Do General Electric’s growth plans add up?
General Electric (NYSE: GE) CEO Larry Culp recently gave investor presentations and what he said helped investors think about the long-term investment opportunity. It’s no secret that GE needs to improve earnings and free cash flow (FCF), and the good news is that it appears to be on the right track. Indeed, Culp referred to a figure of $ 7 billion as an initial target. The question is whether this number makes the stock a good value or not. What’s more, what about GE’s growth prospects once the turnaround is completed?
Culp believes GE is on track to generate around $ 7 billion FCF by 2023 from a combination of $ 85 billion to $ 90 billion revenue with a single-digit FCF margin. Plus, GE’s implicit advice is better than what Wall Street analysts have written, so there is room for optimism.
Culp discussed the issue at Bernstein’s recent annual strategic decisions conference. In summary, he expects around $ 10 billion in operating profit (in 2023) to turn into around $ 7 billion in FCF. These are just rough numbers, so don’t take them as set in stone, but Culp spoke of $ 6 billion in aviation operating profits, with $ 3-4 billion going to health, 1 to $ 2 billion for electricity, with renewables “positive” profit. The midpoints of the ranges total about $ 10 billion in operating profit in 2023 for the industrial company.
Armed with the figure of $ 7 billion, investors can take the current market cap of $ 118.8 billion and envision a valuation of 17 times FCF in 2023. Since many investors see a valuation of 20 times FCF as a valuation. fair value for a mature industrialist. conglomerate, GE seems undervalued.
Beyond 2023 and the $ 7 billion, the key question is whether GE is really just another mature industrial conglomerate with prospects for single-digit profit growth.
Fortunately, there are good reasons to believe that GE Is have good long-term growth prospects. Starting with GE Aviation, the key element to focus on here is long term aftermarket and service income. Essentially, GE Aviation sells aircraft engines at a low or negative margin (at least initially before production ramps up and cost per unit of production declines) in order to generate aftermarket and service revenue. at higher margin. Typically, an engine will have its first “shop visit” in its first five to seven years, then a second after 10 years, then two more visits around year 15 and year 20.
This is a key point to consider because GE and its joint venture with Safran, CFM International, have an installed base of 38,000 engines worldwide, and over 60% of them have only had one. workshop visit. In other words, there is significant long-term growth potential in the existing engine fleet, and with engines on the market. Boeing 737 MAX, Airbus A320neo, Boeing 787 and Boeing 777X, the future looks bright for GE Aviation.
Of course, the pandemic has pushed back workshop visits due to the lack of flight hours and engine shutdowns. However, GE expects engine shop visits to return to 2019 levels in 2023, and from then on, it is reasonable to expect good service revenue growth.
Energy, health and renewable energies
GE Power is likely to be a âself-helpâ story in the next few years. Gas electricity (around three quarters of turnover in 2020) is already positive at FCF, and management is on the way to improving the margin in line with its peers. It’s a somewhat similar story in the energy portfolio (steam, power conversion and nuclear), but with a delay in recovery due to GE’s exit from the new coal-fired construction business.
Culp’s discussion of $ 1 billion to $ 2 billion in FCF is positive. Yet, given the strength of the âenergy transitionâ to renewables, it’s hard to believe that GE Power will grow more than single-digit once its margin aligns with its peers.
GE Healthcare is interesting in that the market rewards healthcare companies with high valuation multiples. This is a point recognized by Culp when he remarked, “We know this company is more valuable to investors, and we can sustainably push that single-digit growth rate into the mid-single-digit range.” It would not be surprising to see the company focus its acquisition and investing activity on the segment.
Regarding renewables, grid solutions and hydropower are expected to strike a balance between 2022 and 2023. In addition, offshore wind is expected to increase from $ 200 million in 2020 to $ 3 billion by 2024. Meanwhile, management is focused on executing low margin legacy contracts in onshore wind and increasing the margin profile on new contracts. Looking longer term, GE has the opportunity to increase revenues from higher margin services (currently only 20% of segment revenues) as the installed base of wind turbines grows.
Is GE good value for money?
The growth prospects discussed above, particularly in the aviation (aircraft engine maintenance) and renewable energy (service revenue growth) segments, suggest that GE has the potential to be more than a single-digit profit growth post 2023. environment. GE’s health and energy business will provide strong support. As such, a price / FCF multiple of 17 times FCF (assuming GE hits $ 7 billion in FCF in 2023) would make the stock a good value.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.