Shares of General Electric (GE 1.54%) are up more than 80% during the past year, and there's reason to believe the run could continue. Not only did management recently raise its overall full-year revenue and earnings forecast, it also raised projection for both its GE Aerospace and in GE Vernova (the combination of GE Power and GE Renewable Energy that will be spun off in early 2024).
Moreover, there are a couple of things, one from each business, that suggest better days are ahead.
General Electric raises guidance
Having started the year predicting 2023 high-single-digit percentage revenue growth and free cash flow (FCF) of $3.4 billion to $4.2 billion, respectively, management raised earnings and FCF forecasts on every earnings call throughout the year. Consequently, its current estimates call for low-teen revenue growth and FCF of $4.7 billion to $5.1 billion.
The midpoint of the FCF estimate puts GE on a year-end price-to-FCF multiple of slightly more than 24. While that's not cheap for a mature industrial company, it's essential to understand that both businesses are set for strong growth, and I want to outline two reasons why.
GE Aerospace
The key metric to follow here is its spares rate, defined as "commercial externally shipped spare parts and spare parts used in time and material shop visits in millions of dollars per day."
Jet airplane engines are typically sold at a loss, with the real money made in the services/aftermarket over the decades the engines are used and overhauled. As such, GE Aerospace's profit margins can bounce around -- deliver more engines, and there's more near-term margin pressure; deliver fewer, and there's more near-term margin expansion.
Consequently, it's a good idea to follow GE's spares rate to see where the underlying business is heading. Doing so makes for happy reading for investors. In fact, the spares rate jumped from $29.4 million a day in the third quarter of 2022 and $32.6 million a day in the second quarter of 2023, to $42.4 million a day in the third quarter of 2023.
Naturally, investors will want to know if this kind of increase is sustainable, and the question came up on the earnings call. What Chief Financial Officer Rahul Ghai said in response suggests it could be. Ghai outlined three reasons for the sharp increase:
- Volume growth as flight departures continue to increase.
- Pricing increases, which were pulled forward from the fourth quarter and run across the last two months in the quarter. Note that this means the fourth quarter will see the price increases in all three months, so it should be an easier sequential and year-over-year comparison.
- Increased work scope on wide-body aircraft (which typically generate more service revenue), and airlines expanding work scope on narrow bodies.
All told, Ghai expects spare-parts revenue to generate "mid-20s growth in the fourth quarter here, which will be in line with where the departures are," and GE Aerospace could continue to increase its spare rate and revenue strongly in 2024 as departures continue to increase.
GE Vernova
Here's a look at management's projections for 2023. GE Power is now a solid earnings generator, but there's work to be done to return GE Renewable Energy to profitability.
GE Vernova |
2022 |
2023 Estimate |
---|---|---|
GE Power profit |
$1.2 billion |
"better" |
GE Renewable Energy profit (loss) |
($2.2 billion) |
"significantly better" |
GE Vernova profit |
($1 billion) |
($100 million to $300 million) |
GE Vernova FCF |
($200 million) |
"flat to slightly improved" |
GE Renewable Energy is actually three businesses: onshore wind, grid-solutions equipment and services, and offshore wind.
The problem area remains offshore wind, where Chief Executive Officer Larry Culp expects $1 billion in losses in 2023 and a similar amount in 2024 as the company works through $6 billion worth of backlog with a "problematic financial profile."
The excellent news is onshore wind and grid solutions were both profitable in the quarter, and Culp expects "improved performance from here," backed by solid order growth and improved execution.
Grid orders were up 50% year over year in the quarter. North American onshore equipment orders were up 40%, driven by GE's renewed focus on its home region benefiting from spending related to the Inflation Reduction Act.
Moreover, GE is significantly improving the profit margins in its backlog in grid and onshore wind, with grid backlog profit margin up 300 basis points in the quarter and onshore up 700 basis points (100 basis points equal to 1 percentage point).
GE's improving businesses
All told, GE Aerospace looks set for a sustained recovery, with management expecting $6 billion in operating profit to rise to $7.6 billion to $8 billion in 2025. Meanwhile, GE Vernova will work through its money-losing offshore contracts while executing on its increasingly profitable backlog in onshore and grid solutions as it marches toward profitability.