It's been an odd year for investors in General Electric (GE +6.68%). The stock spent most of the year in negative territory and significantly underperforming the S&P 500 index. Yet, after a strong couple of months, the stock is only down 9% on the year and notably ahead of the index's 14% decline.
So what's in store for 2023? Can GE outperform and get back to generating positive returns for investors?
General Electric in 2023
The year will be bookended by two major, highly visible events and a lot of blocking-and-tackling work that needs to be carried out behind the scenes. In early January, GE will spin off GE HealthCare by distributing 80.1% of its shares to GE shareholders while retaining 19.1%, which can be used at a later date to raise cash.
NYSE: GE
Key Data Points
It's the beginning of a breakup process that will finish in January 2024, when a combined GE Power and GE Renewable Energy business will be spun off as GE Vernova. The remaining GE business will be focused on aerospace.
How 2022 worked out for General Electric
The best way to gauge the opportunity ahead is to look at management's segmental guidance given on its investor day presentation in March and then compare with the updated guidance given on the third-quarter earnings in October in the table below. Included is what management laid for 2023 in the last column.
As you can see, the full-year profit at GE HealthCare will come in below original expectations. GE Renewable Energy has had a very difficult year, but a turnaround strategy is firmly in place. GE Aerospace is highly likely to exceed the current full-year guidance, given that management said the profit margin would now be in the "high-teens" rather than mid-teens on the third-quarter earnings call. GE Power is on track for its original guidance.
|
General Electric Full-Year Guidance |
March Guidance for Full-Year 2022 |
October Guidance for Full-Year 2022 |
March Guidance for 2023 |
|---|---|---|---|
|
GE Aerospace |
$3.8 billion to $4.3 billion |
$3.8 billion to $4.3 billion |
$6 billion |
|
GE HealthCare |
$3.1 billion to $3.3 billion |
$2.6 billion |
$3 billion to $4 billion |
|
GE Power |
$1 billion to $1.2 billion |
$1 billion to $1.2 billion |
$1 billion to $2 billion |
|
GE Renewable Energy |
($0.7 billion to $0.5 billion) |
($2 billion) |
"approaching breakeven" |
Data source: General Electric presentations.
GE's blocking and tackling in 2023
The challenges GE faced in 2022 will turn into opportunities in 2023. I'm referring to the ongoing supply chain issues the company faced, most acutely felt across GE HealthCare, GE Aerospace, and GE Renewable Energy. The issues have held back margin and profit expansion, and gradually overcoming them in 2023 will open up opportunities for GE.
There are reasons to be optimistic. Order growth (as seen in the following table) remains strong. GE doesn't have a problem with orders, backlog, or end demand. Instead, it's an issue of execution in the face of supply chain issues.
GE Aerospace orders remain in strong growth mode as the commercial aerospace industry continues to recover. It's a recovery that will continue to build in 2023. As noted, GE Aerospace will likely beat management's original guidance for 2022. Throw in an improved aerospace supply chain in 2023, and there's plenty of potential for profit growth.
The decline in orders at GE Renewable Energy is partly due to a turnaround strategy to refocus on its most profitable regions. As such, average selling prices are improving -- its rivals Siemens Gamesa and Vestas are also reporting an improving pricing environment.
The wind turbine manufacturers have suffered, since soaring raw material supply chain costs have crushed margins as they execute on orders won in previous years. Nevertheless, the restructuring efforts, better pricing trends, and working through legacy contracts should lead to improvement at GE Renewable Energy in 2023.
Lastly, you could drive a bus through management's guidance of $1 billion to $2 billion. Still, given the 7% organic growth in orders so far in 2022, it's reasonable to expect GE Power could generate organic growth in excess of its current expectation of low-single-digit growth in 2023.
|
General Electric Segment |
Year-to-Date Organic Orders Growth (Up to the Third Quarter) |
|---|---|
|
GE Aerospace |
20% |
|
GE HealthCare |
4% |
|
GE Power |
7% |
|
GE Renewable Energy |
(26%) |
|
Total company |
2% |
Data source: General Electric presentations.
General Electric in 2023
A battle between slowing top-line growth will categorize the industrial sector, while margins should improve as cost pressures ease. In this context, GE stands relatively well positioned due to its lack of exposure to the consumer and the fact that it suffered more than most due to supply chain pressures in 2022.
These pressures should ease in 2023 as the global economy continues to recover from the self-imposed constraints put on it over the last few years. As such, GE will have a better 2023, and the stock has every opportunity to outperform the market in 2023.
