UAL - Why Did I Sell Most Of My General Electric Shares?

Summary

• General Electric's revenue was $21,787 million in the 4th quarter of 2022, showing a positive trend compared to the previous quarter and the last three months of 2021.
• In Q4 2022, total commercial engine sales were 476 units, up 108 units from the last three months of 2021.
• GE will pay Siemens Gamesa $60,000 for every megawatt of electricity generated by Haliade-X wind turbines off the coast of New Jersey.
• The lack of clear signs of stabilization in the growth of the personal consumption expenditures price index may lead to maintaining the FOMC's target federal funds rate above 4.5% until at least the end of 2023.
• GE Renewable Energy's revenue was $3,413 million in Q4 2022, down 18.6% from Q4 2021, and thus the worst performance of any other GE segment.

On January 4, 2023 , General Electric ( GE ), one of the world's largest conglomerates, completed the spin-off of GE HealthCare ( GEHC ), which develops and commercializes advanced medical technologies and solutions that can dramatically improve patient care. As a result of the spin-off, General Electric investors received shares in a new company whose capitalization, financial performance, and demand for its diagnostic imaging systems are growing in line with my expectations described in the previous article "General Electric: The Future Of The Company's Healthcare Division."

On January 24, 2023, General Electric released its financial report for the fourth quarter of 2022, which once again demonstrated to Wall Street that the strategies implemented by Lawrence Culp are effective and are beginning to bear fruit. The growth in revenue and net income in recent quarters is reflected in the rise in the company's share price and the return of optimism about the future of General Electric.

The financial position of General Electric

General Electric's revenue was $21,787 million in the 4th quarter of 2022, showing a positive trend compared to the previous quarter and the last three months of 2021.

Despite continued supply chain strains and skilled labor shortages due to the COVID-19 pandemic, which is experiencing outbreaks in various regions globally, GE's revenue has shown positive momentum in recent quarters. Following the spin-off of GE HealthCare in early 2023, GE Aerospace is a key division of the multinational conglomerate, helping improve the company's financial position and return investment interest. The recovery in global passenger traffic is benefiting GE's aviation division's revenue growth, which was $7,615 million in Q4 2022, up 25.2% year-over-year. Considering data from the Transportation Security Administration , the total number of passengers was 47.16 million in the first twenty-three days of February 2023, slightly less than in 2019.

In Q4 2022, total commercial engine sales were 476 units, up 108 units from the last three months of 2021. The increase in this indicator was primarily due to the recovery of the global aviation industry, which led to the rise in demand for LEAP engines used in Airbus aircraft (EADSY) and for GEnx engines used in Boeing aircraft (NYSE: BA ).

The table below shows that the world's key airlines, such as American Airlines ( AAL ), Delta Air Lines ( DAL ), United Airlines ( UAL ), and Southwest Airlines ( LUV ), have a fleet that mainly consists of Airbus, Boeing, Bombardier (BDRBF), and Embraer aircraft ( ERJ ).

In addition to General Electric engines, Bombardier and Embraer aircraft use Rolls-Royce engines on a smaller scale.

Overall, I expect GE Aerospace's revenue growth to continue in the coming years, driven by management's ability to innovate during next-generation engine development and provide aircraft manufacturers with solutions and services that outperform the competition.

The situation with General Electric's EBIT

General Electric's EBIT was $2,570 million in Q4 2022, up 70.7% year-over-year. A significant increase in this indicator was achieved due to the innovative approaches of the company's management to reduce the negative impact of inflation on production, the measures taken to reduce costs, increase the number of deliveries of spare parts for passenger aircraft and also increase margins under long-term service agreements. In addition, the EBIT margin was 11.8% in Q4 2022, up 10% quarter-on-quarter and higher than the industrials sector average, despite GE Renewable Energy's weak financial performance.

General Electric's debt situation

General Electric continues to restructure its business to focus on three business segments, namely aviation, which includes the development and commercialization of engines, services for both commercial and military applications, power, and the renewable energy segment. One of the reasons for the improvement in General Electric's financial position and credit ratings is the sale of such non-core assets as the transportation business sold to Wabtec ( WAB ) in February 2019, the lighting business sold to Savant Systems and also the reduction of the stake in Baker Hughes ( BKR ).

At the end of Q4 2022, the company's total debt was $34,743 million, down 8.7% year-on-year.

In recent quarters, the company's management has not taken active steps to reduce GE's debt burden. As a result, this was one of the factors that prompted me to reduce my stake in the company. Given the continued rise in the Fed's interest rate, a key tool in the fight against inflation, I do not expect Lawrence Culp, CEO of General Electric, to redeem senior notes ahead of maturity. Moreover, the Fed's favorite measure of inflation, the PCE price index, rose 0.6% in January 2023 month-on-month, up 0.2% from economists' forecasts.

The lack of clear signs of stabilization in the growth of the personal consumption expenditures price index may lead to maintaining the FOMC's target federal funds rate above 4.5% until at least the end of 2023. According to my model, this will delay the GE Board of Directors from discussing the need to refinance debt and obtain new loans on better terms until at least the second half of 2024, which will also negatively affect the cash flow growth rate. Generally, the total amount of interest payments on borrowings until 2027 is as follows.

In the following, two additional factors will be presented that prompted me to sell a significant portion of my GE shares.

Weakening financial performance of GE Renewable Energy

GE Renewable Energy's revenue was $3,413 million in Q4 2022, down 18.6% from Q4 2021, and thus the worst performance of any GE segment. A key reason for the company's renewables segment revenue deterioration is the onshore wind business due to increased competition from industry mastodons such as Vestas Wind Systems (VWDRY) and Siemens Gamesa ([[GCTAF]], [[GCTAY]]).

Moreover, the total number of wind turbines sold was 487 units in Q4 2022, the lowest in recent years. Even during the rapid spread of COVID-19 worldwide and the following restrictions imposed to contain the virus, turbine sales were significantly higher. In addition, President Biden's Inflation Reduction Act, which, among other things, extends tax breaks for ten years and encourages funding for new onshore and offshore wind projects, has yet to significantly improve demand for GE Renewable Energy's products and services.

GE Renewable Energy continues to lose market share in the fast-growing European market. As a result of Russia's invasion of Ukraine and the subsequent desire of European countries to reduce dependence on Russian energy, the European Commission continues to increase investment in renewable energy. For example, on May 18, 2022 , the European Commission signed an agreement for 30 gigawatts of wind energy above the existing target of 450 gigawatts by 2030. These ambitious goals will have to be achieved with wind turbines manufactured by Siemens Gamesa. At the same time, there is not even the slightest mention of GE in this project of the European Union.

Moreover, GE Renewable Energy's loss was $453 million in Q4 2022, marginally worse than the last three quarters of 2022. On a larger scale, the segment lost $2,240 million in 2022, up 181.8% from the previous year.

In 2023, I expect the downward trend in GE Renewable Energy's profit margins to continue due to rising costs across the company's business units, driven by continued high inflation and reduced turbine deliveries. In addition, due to increased competition, the company will have to pursue a more flexible marketing policy when looking for new customers outside the US, which may lead to increased discounts on GE Renewable Energy products.

Losing the patent battle against Siemens Gamesa and rising offshore turbine competition

GE Renewable Energy has two offshore wind turbine models in its portfolio, namely the Haliade-X and the Haliade 150-6MW. Haliade-X is the company's flagship turbine and has the status of the industry's first 14 MW offshore wind turbine to go full-time. Moreover, until Q3 2022, GE led the offshore wind turbine manufacturer race in terms of power output, and thus many customers in North America and Europe chose the company's products.

However, wake-up calls for General Electric began to arrive in the second half of 2022. First, Vestas has installed a V236-15.0 MW turbine in Denmark, which will be tested before going into series production next year. As the name implies, this turbine has a capacity of 15 MW and thus puts it on a pedestal among offshore wind turbines. Moreover, Chinese manufacturer MingYang Smart Energy plans to build two offshore wind turbines, each with a capacity exceeding 16 MW in the South China Sea.

Moreover, GE Renewable Energy is losing out to competitors in its offshore wind turbine portfolio. So, for example, Siemens Gamesa and Vestas have turbines with power in the range of 8-11 MW, while GE has only two turbines, one of which produces 6 MW of power, and the production of Haliade-X with a capacity of 14 MW will be significantly limited due to the defeat in a patent battle against Siemens Gamesa. According to the decision of the US District Judge, GE will pay the Spanish-German company $60,000 for every megawatt of electricity generated by the Haliade-X wind turbines located off the coast of New Jersey. In addition, the judge banned the sale and operation of these turbines, except for those that will be installed as part of existing projects off the coast of Massachusetts and New Jersey . Consequently, I believe that GE Renewable Energy will have to spend tens of millions of dollars to make design changes to get the Haliade-X injunction lifted. In parallel, European competitors will continue to increase their share in this market, which begins to flourish after the entry into force of the Inflation Reduction Act of 2022.

Conclusion

Since the publication of the last article about General Electric, the company's share price has risen by 24.5%, excluding received shares of the spin-off GE HealthCare. Considering the shares of GE HealthCare, whose price increased after the listing by more than 44%, an investment in the much-criticized conglomerate managed by Lawrence Culp would bring the investor more than 65% of the return, thus significantly outperforming the S&P 500 ( SPY ).

However, due to the continued high inflation and relatively low rate of its decline, this will have a negative impact on the rate of recovery of the margins of GE segments that I predicted earlier. GE Renewable Energy's revenue and net income continue to decline, and I expect the negative dynamics to continue in the coming quarters due to the loss in the patent battle with Siemens Gamesa coupled with increased competition among renewable energy companies, I decided to take profits, obtained from the growth in the price of General Electric shares and wait for more favorable macroeconomic conditions. If the price of the company's shares corrects below $70 per share, then I plan to rebuy them due to the improvement in the situation with the demand for products and services of GE Aerospace, which remains a leader in the aviation industry.

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