General Electric's (GE 1.30%) management held its yearly investor conference, and shareholders liked what they heard. It's been a long time coming, but the industrial giant looks set to significantly improve earnings across all its businesses simultaneously in the coming years. Here's why the presentation cheered the market.
General Electric's businesses are improving
As a reminder, the spin-off of GE HealthCare Technologies has left the industrial giant with three main businesses in aerospace, power, and renewable energy. Management is combining the power and renewable-energy businesses into one company, GE Vernova, which will be spun off in early 2024, with the remaining company named GE Aerospace.
Going into the presentation, investors had concerns about all three businesses, and the good news is all three were addressed by management. I'll briefly summarize investors' main questions before the presentation and then outline what was new.
GE Aerospace
First, in aerospace, investors were concerned about profit margins as CFM International (GE's joint venture with Safran) is about to significantly ramp up its production of LEAP engines (used on the Airbus A320 family, the Boeing 737 MAX, and the Comac C919). That's an issue for profitability because the engines are loss-making and therefore reducing profit margins. The real money is made on decades of aftermarket revenue. LEAP engine production is forecast to increase from 1,136 units in 2022 to 1,700 in 2023 (a 50% leap -- forgive the pun -- in production), with another 2,000 in 2024 (an 18% increase on 2023).
In addition, it's worth noting that GE Aerospace's margin declined to 18.8% in the fourth quarter compared with 20% in the same quarter of 2021. The non-LEAP margin concerns center on the difficulty in overcoming significant supply-chain and raw-material cost inflation, and the stretch across GE's commercial aerospace business and its smaller military business too.
What management said: While declining to give 2024 guidance, management outlined a pathway to 2025, with low, double-digit-to-mid-teens annual revenue growth and free cash flow equivalent to net income. Most importantly, management believes it can improve its profit margin from 18.3% in 2022 to 20% in 2025 -- a good result considering the LEAP impact.
Image source: Getty Images.
GE Power
It's easy to overlook the segment as a low-growth and steady cash-flow business, but I think this was one of the brightest spots in the presentation. Returning to the outlook meeting in 2022, management had forecast a profit of $1 billion to $1.2 billion and then a very wide range of $1 billion to $2 billion in profit for 2023.
Given that profit came in at the top of the guidance range for 2022 (at $1.2 billion), hopes were high that GE might guide toward the high end of the previously given $1 billion to $2 billion range for 2023. However, somewhat disappointingly, management only guided toward "slightly better" than $1.2 billion on the Q4 earnings call in January.
What management said: There was no update on 2023 headline guidance, but management guided toward low, double-digit profit growth in 2024. That would be a good result because GE Vernova needs the earnings and cash flow from GE Power to support the renewable-energy business as it resets.
GE Renewable Energy
This business is a problem area at GE and a significant cause for concern ahead of the GE Vernova spin-off. The business lost a whopping $2.2 billion in 2022 and had a cash outflow of $2 billion. Moreover, management's guidance in January didn't give much cause for optimism; operating profit would be "significantly better" and free cash flow would be flat-to-improving. Frankly, it's not hard to "significantly" improve a $2.2 billion loss. "Flat" implies it could be another $2 billion in 2023.
What management said: Fast forward to the investor conference, and it is now forecasting a return to profitability for renewable energy in 2024. That would represent a significant turnaround in 2022 and 2023, and with management forecasting renewable-energy cash flow will approach breakeven in 2024, GE Vernova could produce good cash flow in 2024, driven by ongoing improvement at GE Power.
Image source: Getty Images.
General Electric prepares for growth
In sum, GE Aerospace continues to enjoy the recovery in commercial aerospace; there's more pricing discipline and organizational rigor at GE Renewable Energy and other wind companies; and GE Power's solutions are attracting more interest given the power issues many parts of the globe faced in 2022. Accordingly, management's updated guidance reflects these themes and underlying operational improvements at GE.
