2023-04-27 08:07:49 ET
Summary
- Shares of General Electric have pulled back after management reported results for the first quarter of the company's 2023 fiscal year.
- This comes at a time when revenue and adjusted earnings topped expectations.
- Cash flows are encouraging, net debt is now negative, and management revised expectations higher for the year.
- This proves the disconnect between the industrial conglomerate and the market.
- Investors have an opportunity to take advantage of this disconnect given the drop in price we experienced.
As one of only 10 companies that I currently own shares in, General Electric ( GE ) is an enterprise that I follow very closely. For much of the time that I've held the stock, things have gone quite well. In a little over a year, my overall return is about 24% excluding the modest dividend that the company pays. However, there seems to have been something of a negative shift in sentiment by the market over the past couple of days. After the management reported financial results covering the first quarter of the company's 2023 fiscal year, shares of the business pulled back about 1.7%. They have continued to decline after that. This seems rather peculiar because you would expect it to be in response to some weak financial results. But for the most part, the company actually did quite well. Given the data that did come out regarding the enterprise, as well as where I believe the business is going moving forward, I still do believe that, even though shares have risen materially over the past year or so, that it warrants a 'strong buy' rating still.
Headline news came in strong
On April 13th, I wrote an article wherein I looked at what investors should be paying attention to for when management reported financial results for the first quarter of the company's 2023 fiscal year. At the top of the list, I placed the headline news items like revenue and earnings per share. At that time, analysts were forecasting sales of $13.46 billion. If this had come true, it would have represented a decent increase over the $12.68 billion in revenue that the company reported one year earlier after stripping out its healthcare business that was subsequently spun off. What actually was reported was even better. Revenue for the quarter came in at $14.49 billion. That's 14.3% above what it was one year earlier.
This increase was driven by strength across two primary portions of the business. Most significant was the GE Aerospace unit, with revenue of $6.98 billion dwarfing the $5.60 billion reported only one year earlier. Management attributed this increase to a couple of factors. For instance, commercial services activities and commercial engines sales were the primary drivers behind this increase. This makes a great deal of sense when you consider what's going on in the aviation space. Following the end of the COVID-19 pandemic, providers of commercial flights began to travel more, causing the demand for commercial aircraft, as well as repairs and other services related to commercial aircraft, to increase. This revenue growth was offset to some degree by weak defense sales.
Another big driver for growth from a revenue perspective involved the Power segment of the company. Revenue of $3.82 billion came in higher than the $3.50 billion reported for the first quarter of the 2022 fiscal year. Growth associated with the company's aeroderivative operations, as well as an increase in the number of gas turbine shipments experienced, helped on this front. This is not to say that all parts of the company experienced strength. On the revenue side, the Renewable Energy segment of the company saw revenue dipped slightly from $2.87 billion to $2.84 billion. But actual organic growth year over year would have been 5%.
On the bottom line, the company also outperformed. The firm reported earnings per share from continuing operations of $5.56. That's a vast improvement over the $1.16 per share loss experienced one year earlier. Given the nature of the company, particularly when it comes to the recent structural changes that management has made, I do believe that adjusted earnings would be a more appropriate measure. And in this regard, the company also outperformed. Analysts were anticipating a profit per share of $0.14. But the actual number ended up coming out at $0.27. That's up from the $0.09 per share loss experienced one year earlier.
Digging deeper
Outside of the headline news, there's a lot of information that we can get from the company. And this is where the data starts to look exciting. For instance, the company reported some rather strong numbers when it came to the GE Aerospace segment. Total orders for the quarter, for instance, came in at $8.21 billion. That's 14% above the $7.21 billion reported one year earlier. On top of this, segment profits expanded from $908 million to $1.33 billion. That implies an increase in its segment profit margin from 16.2% to 19%. Cost cutting initiatives, combined with higher pricing and the economies of scale that come with increased production, can work wonders. In my earnings preview for the company, I even looked at the historical segment profit margin. To see it continue to climb is wonderful. Although, sadly, management has yet to increase their segment operating profit forecast for this unit for the year. They still anticipate a reading of between $5.3 billion and $5.7 billion.
Although the Power segment reported a nice increase in revenue, actual orders dipped slightly year over year, dropping from $4.16 billion to $4.15 billion. That's not bad, but it's not great either. The real surprise came from the Renewable Energy segment of the company. This unit focuses on wind turbines and other alternative energy sources. Even though revenue for this unit dropped, orders shot up from $2.79 billion to $5.35 billion. Management attributed this increase to contract wins that the company achieved in both its grid and onshore wind operations. But this is not to say that this segment is out of the woods yet. Although it did experience a slight improvement in bottom line results, the firm still generated A segment loss of $414 million for the quarter.
Moving away from individual segments, it's important to recognize that the company had a major win when it came to orders in general. Total orders were up 26% year over year, coming in at $17.6 billion. This increase helped bring the company's backlog up to $242.05 billion compared to the $236.58 billion it was only one quarter earlier. In addition to this, the company also reported something else rather interesting. Operating cash flow was only $155 million for the quarter. But that was a significant improvement over the $924 million outflow in capital reported for the first quarter of 2022. This cash flow, combined with a significant amount of cash on its books and investments that are held for sale, has allowed the company to essentially be debt free on a net basis. After factoring in cash and cash equivalents, the company has cash in excess of debt totaling $2.39 billion. That compares to the $640 million in net debt it still had at the end of 2022.
A sizable portion of this liquidity is in the form of shares that the company has in GE Healthcare Technologies ( GEHC ) and AerCap Holdings ( AER ). As of the end of the most recent quarter, the company had 90.3 million shares of GE Healthcare Technologies, worth about $7.41 billion at that time. It also owned 79.7 million shares, worth $5.40 billion (inclusive of $922.5 million of a senior note), of AerCap. The AerCap stake is in spite of the fact that the company sold off $1.8 billion worth of shares throughout the quarter. It's also worth noting that, during the quarter, the company sold off the remaining $200 million worth of stock that it owned in Baker Hughes ( BKR ). With the debt picture for the company no longer an issue, the pharmacy seems to be in really solid shape and has been de risked significantly.
As for the future, management seems even more optimistic than they were previously. The current expectation for the year is for earnings per share to come in between $1.70 and $2. Previously, the forecast was for this to be between $1.60 and $2. Free cash flow is also expected to come in stronger at between $3.6 billion and $4.2 billion. That compares to the $3.4 billion to $4.2 billion that management previously anticipated.
Takeaway
Pretty much by any measure you could expect to look at, General Electric did really well for itself during the first quarter. I know that shares experienced a pullback, almost certainly because of general market conditions. But it would have been difficult for me to be happier about these developments. Yes, we could have seen more progress in both the Power and Renewable Energy segments. But outside of that, I don't see much to be unhappy about. For these reasons, I do still feel comfortable in my bullish thesis for the company to the point where a 'strong buy' rating is still logical in my book.
For further details see:
General Electric: The Market Got This One Wrong