Stock currently showing signs of heavy loss appears to offer attractive pricing now
General Electric (GE) has released its Q2 results, revealing a mix of positive and challenging developments across its various business segments.
The performance of GE Renewable Energy has been disappointing, with a revenue decline of 18% and a segment loss of $853 million. This underperformance is in stark contrast to the expectations set out in the investor day presentation in March.
In comparison to the March presentation, there are significant differences in the reported results for the first half and the updated guidance. GE's free cash flow (FCF) guidance of $5.5 billion to $6.5 billion was revised downward, with a projected "push out approximately $1 billion of free cash flow into the future."
GE Healthcare is expected to come in some $200 million below the midpoint of initial full-year guidance. The company is facing challenges due to raw material and supply chain inflation, as well as COVID-19 lockdowns in China, which may require a strong second half to meet the guidance.
However, there are promising signs elsewhere within GE. GE Power is on the right track, standing as a testimony to the CEO of GE Vernova's work in restructuring the business. GE Power's revenue is experiencing low-single-digit growth, with an operating profit of $1 billion to $1.2 billion.
GE Aviation is another bright spot, with organic revenue growth above 20% and an operating profit of $3.8 billion to $4.3 billion.
GE Vernova, the company's energy transition and related businesses, is showing signs of improvement. Although 2023 FCF outlook for GE is now much more uncertain, GE Vernova's financial performance is noted to have improved significantly. In 2023, GE Vernova's free cash flow was essentially breakeven, but the company is expecting significant improvements in future years, with a forecasted free cash flow of between $3 billion and $3.5 billion for 2025.
The current market cap of GE is $78.7 billion, which on an estimated FCF of $4.5 billion for 2022, puts it at 17.5 times FCF for 2022. The stock's valuation will attract investors due to its potential upside.
RBC analyst Deane Dray questioned the company's long-standing target of $7 billion in FCF in 2023, but management did not explicitly reiterate this target. However, management still expects a significant improvement on profit as well as free cash flow for 2023.
Despite the challenges faced by some of its business segments, GE maintains its headline guidance for full-year revenue growth in the low-single-digit to mid-single-digit range and adjusted earnings per share of $2.80 to $3.50.
The table comparing the investor day presentation in March with the reported results for the first half and the updated guidance shows a few key differences, highlighting the evolving financial landscape at GE. The company's Q2 results underscore the ongoing restructuring efforts within GE, with a focus on improving its financial performance and achieving its long-term goals.
- Investors may find the current market cap of GE attractive, as it values the company at 17.5 times its estimated FCF for 2022, considering the stock's potential upside.
- Despite the underperformance of GE Renewable Energy and the revised free cash flow guidance, some business segments, such as GE Power and GE Aviation, are showing promising signs of growth.
- In the technology and general-news realm, the ongoing restructuring efforts within GE, as reflected in its Q2 results, are noteworthy, with a focus on improving financial performance and achieving long-term goals.
- RBC analyst Deane Dray cast doubts on GE's long-standing target of $7 billion in FCF in 2023, yet management still expresses optimism for a significant improvement in profit and free cash flow for that year.
