2023-07-18 05:36:11 ET
Summary
- General Electric is expected to announce its Q2 2023 financial results on July 25th, with investors focusing on revenue, profits, and backlog as key indicators of the company's health.
- The company's aviation segment, GE Aerospace, is predicted to perform well due to the recovery of the aviation market, with contracts won at the Paris Air Show potentially growing backlog.
- Investors are also advised to monitor the performance of the Renewable Energy and Power segments, which will form GE Vernova following a spin-off, and the company's debt situation.
Before the market opens on July 25th, the management team at industrial conglomerate General Electric (GE) is expected to announce financial results covering the second quarter of the company's 2023 fiscal year. The past couple of years have been a time of significant transformation for the company, some for the better and some for the worse. But overall, it does look as though the picture is looking up for the enterprise. Heading into the earnings release, there are a few items that investors would be wise to pay careful attention to. After all, these particular metrics will go a long way toward determining the overall health of the company and, likely, how well the firm should perform for the next few months.
Keep an eye on headline news
The first thing that investors will focus on when management announces financial results will be the headline news items. These items include revenue, profits, and perhaps leading indicators like backlog. Normally, it would be easy to compare what analysts are forecasting to what the company has achieved in prior years. But this year is rather difficult because, at the start of the year, the company did spin off its healthcare segment into what is now known as GE HealthCare Technologies (GEHC).
The good news is that it should be easy to understand the revenue picture, since revenue is easy to remove when we are talking about individual segments. At present, analysts believe that sales for the company will total $15.15 billion for the second quarter of 2023. This would compare to the $18.65 billion the company reported at the same time last year. However, if we remove the aforementioned healthcare operations, this number would drop to $14.13 billion. That translates to a year over year increase of roughly 7%.
The bottom line becomes much more difficult to understand. I say this because you can't really strip out net profits associated with the divested assets from the second quarter of last year. Once management announces financial results for the second quarter, we will then have some idea what the picture will look like. What I do know, however, is that analysts are forecasting earnings per share of about $0.54. This would translate to net profits of about $592.4 million. On an adjusted basis, meanwhile, the forecast is for the company to generate earnings per share of about $0.46. That would be about $504.6 million.
The last big headline news item that investors should be focused on will be overall backlog for the company. As of the end of the first quarter of this year, backlog for the company totaled $242.05 billion. That's up from the $236.58 billion the company reported at the end of the final quarter of last year. And it stacks up nicely against the $227.65 billion in backlog that the company had at the end of the second quarter of last year if we strip out its healthcare operations. Growing backlog is almost always a positive sign since it indicates that future revenue should be higher than past revenue. Of course, there is always a chance of booking projects that the company would go on to generate a loss from. And the company has done that to some degree in the past. But in general, growing backlog is positive. One of the key drivers of higher backlog would be orders. In the first quarter of this year, the company achieved $17.6 billion worth of orders across its three operating segments. That was 26% higher than the same time last year.
Focus primarily on aviation
As those who follow General Electric closely know, the company is gearing up for another major spin off. That will consist largely of the Power and Renewable Energy segments of the company into what will become known as GE Vernova. That is slated to occur early next year. What will remain who will be the aviation part of the company, currently known as GE Aerospace. This is the part of the enterprise that focuses on building jet engines and providing various products and services for them.
This part of the company is and has been, for the past several years now, the real cash cow for shareholders. There was a time during the pandemic when the fundamental picture of this segment had worsened. But in recent quarters, we have seen some major improvements. During the first quarter of 2023, for instance, the Aerospace segment of the company generated revenue of $6.98 billion. This represents an increase of 24.6% over the $5.60 billion generated the same time last year. Over this window of time, segment profits jumped 46% from $908 million to $1.33 billion. This implies an expansion for the company's segment profit margin from 16.2% to roughly 19%.
As I have detailed in prior articles such as this one and this one , the aviation market is showing significant signs of recovery. Global air traffic is approaching pre-pandemic levels and US air traffic is basically there. This bodes well for shareholders. And even management is very optimistic. For 2023 in its entirety, they anticipate organic revenue associated with this segment to be between the mid and high teens above what it was in 2022. They are also forecasting operating profits of between $5.3 billion and $5.7 billion. This stacks up nicely against the roughly $4.7 billion the company reported for the 2022 fiscal year.
The second quarter earnings release will be particularly important because the company did likely benefit significantly from its presence at the Paris Air Show in June of this year. We do know that the company did win some contracts, such as those with Riyadh Air, Republic Airways, and Garuda Indonesia. But it's unclear what impact this might ultimately have on backlog. In the most recent quarter, backlog for the Aerospace segment totaled $137.43 billion. This was up from the $135.26 billion reported one quarter earlier.
Other items worth paying attention to
Though I am not as focused on the components of the company that will make up GE Vernova as I am on its aviation business, I do think investors would be wise to pay attention to what happens on that front. For context, the Renewable Energy part of the company has really been struggling. Revenue in the first quarter of 2023 came in at $2.84 billion. That was down marginally from the $2.87 billion generated one year earlier. At the same time, the segment lost $414 million compared to the $434 million loss experienced one year ago. This is a real drag on operations.
And when it comes to the Power segment, the picture isn't much better. In the first quarter of the year, revenue of $3.82 billion beat out the $3.50 billion reported one year earlier. But segment profits still remained quite low at only $75 million compared to the $63 million reported at the same time of the 2022 fiscal year. In order to have a successful split off like the company did with GE HealthCare Technologies earlier this year, it would be important for the bottom line results of these segments to show some real strengthening between now and the end of the year.
Lastly, investors should continue to pay attention to the debt situation for the conglomerate. At the end of the most recent quarter, the company actually add cash that exceeded debt in the amount of $2.39 billion. That involved billions of dollars' worth of securities in the form of the firm's shares of GE HealthCare Technologies and AerCap (AER). As of the end of the most recent quarter, the conglomerate owned 90.3 million shares of GE HealthCare Technologies, which corresponded to a 19.9% stake of the business. And it owned 79.7 million shares of AerCap that totaled 33% of the enterprise. We do know that in June, the company exchanged 25 million shares of GE HealthCare Technologies at a net price of $76.54 per unit, totaling $1.91 billion on a net basis, for an equivalent amount of debt. The underwriters had an option for another 3.75 million shares that could have brought that net amount of debt reduction to $2.20 billion. But we don't know if that was actually followed through on or not. Very likely, it was. But either way, investors should also be paying attention to see if other moves like this have been made or are likely to be made. Even though it means nothing on a net basis, the reduction of debt does lower interest expense for the company.
Takeaway
Based on the data provided, I will say that I am optimistic at this time. I think that General Electric is likely to do quite well when it reports financial results. I no longer own shares of the company since I sold them not too long ago. But even after selling them, I felt comfortable rating the company a 'buy' to reflect my view that shares should outperform the broader market. Since the downgrade from the 'strong buy' rating that I assigned the company previously, the firm has delivered on this expectation, with shares generating upside of 9.7% compared to the 7.1% seen by the S&P 500 over the same window of time. And absent anything big and unexpected occurring that is negative, I believe this trend will probably continue.
For further details see:
General Electric Q2 2023 Earnings Preview: What Happens Next Is Very Important