2023-04-13 09:12:18 ET
Summary
- The management team at General Electric is due to report financial results for the first quarter of the company's 2023 fiscal year later this month.
- Analysts expect organic revenue to grow, while profits should come in positive compared to last year's negative reading.
- In all, the company looks like a solid opportunity heading into earnings, even though the stock has already risen so much in recent months.
April 25th is going to be a big day, for better or worse, for shareholders of industrial conglomerate General Electric ( GE ). Before the market opens, the management team at the business is expected to announce financial results covering the first quarter of the firm's 2023 fiscal year. Thanks in large part to the spin-off of GE HealthCare Technologies ( GEHC ) earlier this year, shareholders of the company have benefited nicely from holding the stock. In fact, year to date as of this writing, shares are up about 44% if we include the modest distributions their investors have received. Although it may seem unlikely that additional upside could be on the table, I would make the case that the company still has some value in it. But in these uncertain times, it wouldn't be a surprise to see some revision in how the company looks moving forward. And there is little doubt that the greatest opportunity for such a revision will come as part of the firm's quarterly results. After all, it's during these times that management provides a real glimpse into how things are going. In anticipation for this earnings release, there are a few things that investors should be paying attention to. But absent anything truly unexpected occurring, I do believe that the company still warrants a ‘strong buy’ rating at this time.
Watch headline news
When management announces financial results for the first quarter of the 2023 fiscal year, the first thing that investors will look at will be the headline news. At the very top, we will have the revenue data reported by management. For context, analysts are currently anticipating sales of $13.46 billion for the quarter. In the first quarter of the 2022 fiscal year , management reported revenue of $17.04 billion. At first glance, this would imply a rather steep decline in sales. But it's important to factor in the aforementioned spin-off that occurred earlier this year. Stripping that out of the picture, revenue in the first quarter of last year came in at $12.68 billion. So if analysts end up being accurate in their assessment, this would imply a year-over-year increase in revenue of 6.2%.
Although this may seem unlikely, it is important to note that management forecasted revenue growth that would be in the high single digits for the 2023 fiscal year. So it seems to me as though analysts might be a bit conservative in their approach at the moment. The greatest revenue growth, undoubtedly, will come from the GE Aerospace portion of the business. This is the segment that will be left over after the company spins off its other assets, which largely consists of its Power and Renewable Energy segments (and will be called GE Vernova), Early next year. The current expectation is for sales, on an organic basis, to grow at a rate in the mid to high teens. By comparison, GE Vernova is expected to see organic growth either in the low-single-digit range or the mid-single-digit range.
On the bottom line, the picture becomes much more difficult. Earnings per share are forecasted to be about $0.20, with adjusted earnings per share of $0.14. In the first quarter of last year, earnings per share were negative to the tune of $0.99, with earnings per share from continuing operations coming in negative to the tune of $0.74. If analysts are correct when it comes to this, it would imply net income of $220.2 million, with adjusted profits of $154.1 million. By comparison, the same time last year, the company incurred a net loss of $1.09 billion, with a net loss from continuing operations of $809 million. The reason why I say this is much more difficult to assess is because of the aforementioned spin-off. The only thing management provides on the bottom line is segment operating profit. We don't have enough data to see the full bottom line impact of not having GE Healthcare Technologies on its books.
What we do know, however, is that segment operating profits for that firm totaled $538 million during the first quarter of last year. So this seems to suggest that the remaining businesses that are currently on the books will have to do a lot of the heavy lifting. What we do know is that management is forecasting operating profits for the GE Aerospace business this year of between $5.3 billion and $5.7 billion, while operating profits for GE Vernova should be negative by between $0.2 billion and $0.6 billion. When you consider that GE Vernova’s operating loss for all of 2022 was $1.02 billion, and that operating profit for GE Aerospace was $4.78 billion for all of last year, this does suggest significant improvements on both fronts.
Aerospace is the key
Although investors would be wise to pay close attention to all of the operations when General Electric reports, I do believe that the most important part of the company is its GE Aerospace business, formerly known as the Aviation segment. After experiencing a great deal of pain over the prior few years, with issues related to Boeing ( BA ) aircraft, as well as a plunge in demand for aviation services resulting from the COVID-19 pandemic, the company finally started showing significant improvements last year. From 2020 through 2022, revenue jumped from $22.04 billion to $26.05 billion. During this time, segment operating profits shot up from $1.23 billion to $4.78 billion. Although it's true that the Power segment also was showing signs of turning around, there is no doubt in my mind that GE Aerospace is what truly held the company together during those dark days.
Naturally, investors will want to see whether the aforementioned guidance offered by management are showing signs of coming true. As I stated already, the firm is forecasting sales growth that is in the mid to high teens range. We have no idea if this will be evenly spaced throughout the year, or if there will be some trend. But if we assume a growth rate for the first quarter of between 10% and 20%, that would take sales for this particular segment up from $5.60 billion last year to between $6.16 billion and $6.72 billion. And of course, profitability is always important. A segment profit margin of between $5.3 billion and $5.7 billion off of revenue that is, say, 15% higher year over year, would imply a segment profit margin of between 17.7% and 19% for all of 2023. For context, during 2022, that figure came in at 18.3%.
Another part of this will be the backlog that management ultimately reports. In the final quarter of the 2022 fiscal year, management reported backlog for the GE Aerospace portion of the company of $352.6 billion. This was roughly 16% higher than what the company had only one year earlier. By comparison, Power backlog was roughly flat year over year, while Renewable Energy backlog grew a modest 4%. I can understand, given current economic conditions, why investors might be concerned about assuming such meaningful growth. But keep in mind that one source I looked at indicated that, by the end of this year, global aviation traffic should be about 3% higher than it was in 2019. For context, at the end of last year, traffic was only at 75% of 2019 levels. And next year, the forecast is for traffic to be about 4% above what it was prior to the pandemic. Add on top of this the revenue opportunities associated with the military, and I wouldn't be surprised if things go better than expected.
Financial changes
There are some other items that investors should be keeping an eye on. At this time, General Electric no longer has a significant amount of debt on its books. It ended the 2022 fiscal year with net debt, excluding long-term investments, of $7.48 billion. Part of what went into this calculation was the investment securities that the company was planning to sell off in the near term. At the time, this included $207 million of Baker Hughes ( BKR ) stock and $7.40 billion worth of AerCap Holdings ( AER ) stock. We do know that, in March of this year, the company arranged to sell 23 million shares of AerCap stock for roughly $1.35 billion, with an underwriter’s option of an additional $201.8 million, plus $500 million worth of stock sales that were made to AerCap itself.
Although this may not impact net debt, it could impact gross debt if the proceeds were used to pay down debt. As part of the spin-off of GE Healthcare Technologies, the company also kept a 19.9% stake in the enterprise. Management did say that they planned to completely divest of this ownership eventually. But we don't know how much is currently owned as of today. If they still own the full amount, it would be worth about $7.40 billion as of this writing. On top of this, in early January, General Electric received a $1.5 billion payment from GE Healthcare Technologies thanks to $2 billion of indebtedness that the former subsidiary took on that month. On top of all of this, management is forecasting free cash flow this year of between $3.4 billion and $4.2 billion. That compares to the $3.1 billion seen one year earlier. All of this, combined, could easily wipe out the company's debt if management so desires.
Takeaway
Based on the data provided, General Electric seems to be in a much better space than it had been over the prior few years. Although it has been a bumpy ride and it has required significant changes at the enterprise, the picture moving forward looks much better. Once it spins off its other non-core assets next year, the company will be more or less a peer play aerospace opportunity. And absent any major and unexpected changes, I do believe that attractive upside could be on the table for investors as we near that point.
For further details see:
General Electric: Still A Strong Prospect Heading Into Earnings