General Electric's Encouraging Glimpse Into The Future

Summary

• The management team at General Electric decided to give shareholders a glimpse into the conglomerate's foreseeable future.
• The business does seem to have some issues still moving forward, but the fact of the matter is that the future is looking much better.
• Investors should be optimistic, especially if transitory issues resolve quickly this year.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Get started today »

Every year, the management team at General Electric (NYSE:GE) gives an in-depth look into its own expectations for the industrial conglomerate's current fiscal year. With 2019 now out of the way, March 4th made sense for management to peer into the future and see the ups and downs of the 2020 fiscal year. Not surprisingly, there are a lot of bumps expected for the business and shareholders need to be prepared for them. But at the same time, there are also a lot of positive aspects that warrant consideration and appreciation. In all, the company is showing continued signs of recovery, and while I expect 2020 to result in some headaches for the firm, it should also be the definitive turning point for the business that leads it back to high-quality status from an investment perspective.

Some bumps along the way

Taken from General Electric

Before we get to the good news, let's hop into the bad. The most interesting thing in management's guidance was the amount of detail associated with the coronavirus, COVID-19. According to management, this will have negative impacts across many of its business operations, but the largest impact will likely be related to the firm's Aviation business. After all, aircraft in General Electric's fleet have seen departures in China decline by 60% as a result of the outbreak. Service billings have dropped as a result of this as well.

*Taken from General Electric

On the whole, the Asia/Pacific region of the world accounts for 35% of all global air traffic. According to the IATA, it's estimated that RPK (revenue per kilometer) in the airline industry will drop 28% from December/January to January/February. It'll then go on to drop another 38% in February/March. Management has been wise not to make assumptions for anything beyond the first quarter, because there's no telling just how long or how bad the pandemic will last. Between all of the aforementioned factors, as well as reduced commercial demand for the firm's Healthcare, Power, and Renewable Energy operations, as well as associated supply chain difficulties, the company believes that COVID-19 will negatively affect free cash flow by between $0.3 billion and $0.5 billion during the first quarter this year. All guidance discussed later in this article assumes issues don't persist beyond the first quarter.

Taken from General Electric

Two other issues for General Electric for the current fiscal year are the firm's continued pressure from the 737 Max and weakness associated with its Renewable Energy business. In the former, management did not actually provide any detailed guidance, but last year it said that an impact from the 737-Max of around $0.4 billion per quarter was realistic. If the aircraft does get the okay to fly again by mid-year, the impact on the business should end up being minimal, but any guess on this front is speculative in nature. On the Renewable Energy side, tailwinds caused by costly past projects have hurt the business. That looks set to continue this year. This will namely be in the form of reduced revenue associated with the company's grid and hydro operations. As a result, free cash flow for Renewable Energy will be worse than the -$1 billion seen last year. Only come 2021 will we see this improve some.

Taken from General Electric

The good news is worth the pain

Taken from General Electric

While investors need to be prepared for continued uncertainty, the good news is that there's plenty of good developments to offset this. The most obvious is free cash flow as projected by the firm. As of now, management is forecasting industrial free cash flow for the conglomerate to come in at between $2 billion and $4 billion. This will be driven by revenue growth in the low single digits and an improvement in the company's margins of 37.5 bps (basis points) at the midpoint and 75 bps at the high end. To put this in perspective, industrial free cash flow in 2019 was only $2.3 billion, so while 2020 could end up lower than 2019, that would be unlikely.

Taken from General Electric

The real drivers of progress for the firm this year will be its Aviation segment and its Power segment. Aviation is forecasted to grow at the low-single-digit rate this year and next. Its margin this year should approximately match last year's figure, meaning that when combined with increased sales, its free cash flow should be either flat or above compared to the $4.4 billion seen in 2019. In 2021, this should continue to improve as margins expand further. Power, meanwhile, will see improvements in both sales and margin, but in 2019, the segment generated free cash flow of -$1.5 billion. This will leave it still in the red this year, though it is expected to turn positive come 2021.

Taken from General Electric

Improvements are not just taking place at General Electric's largest segments. They are also taking place at the firm's corporate level. Back in 2019, the firm's corporate operating costs totaled $1.7 billion. Continued restructuring by the business will result in this figure dropping to between $1.4 billion and $1.5 billion this year. Though this is a material improvement, if achieved, the real improvement is expected to come in 2021 when corporate operating costs are forecasted to decline to only around $1 billion annually.

Taken from General Electric

Another positive development for General Electric relates to the firm's deleveraging. Investors already knew that the company was well on its way to an industrial leverage ratio of 2.5 or lower, but management decided to reaffirm that now. This year, the company is looking at at least $23 billion in deleveraging activities. This should be easily funded though. After all, it still intends to close its BioPharma sale in the current quarter, with net proceeds from that coming in at around $20 billion. The company also plans to continue selling off its stock in Baker Hughes (BKR), though it did not disclose how much or what its expected proceeds are from it. While I believe divesting of an energy services firm is not the way to go, the reduced leverage and emphasis on core operations is a major positive.

Taken from General Electric

Takeaway

Right now, I understand why some market participants are wary of General Electric. This is especially true with issues like the 737-Max and the new pandemic known as the coronavirus. Both of these could still throw a meaningful wrench into General Electric's plans, but anything like that should be viewed as one-off concerns that don't reflect the true value potential of the business. In all, General Electric is doing well for itself and its shareholders, and I believe that it's only a matter of time before this shines through in the form of improved financial standing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Old Wizard]

Very clever of GE to use the Coronavirus to reduce pension and LTC funding requirements. Management must be geniuses to imploy such a novel plan. Just being sarcastic. Using the too often employed macro financial statement “off set” by less old people taking planes thus impacting GE’ aviation business negatively. Since these are not easily quantified i’ll Choose to say they have the same impact on cash flow. Sounds fairly erudite, but in reality I have no idea what either the short term nor long term impact on GE fortunes is. Certainly if this virus outbreak is relatively as big as Italy’s, it probably will have a negative effect on GE’s numbers, that is significant. I guess if we really need to get a firm prediction, we should ask Tusa.

[mk1992]

The virus will generally hit everybody's biz and the hit will generally be temporary. The FEDs have made sure all the big companies will survive through beefing up the banks. Only thing that permanent for GE, reduction of # of guys on LTC and pension. Oh, Congress needs to do their share/more for the little guys to make sure they still have money to spend while being locked out of work.

Don't need to think too much. China and Asia is ahead in time for this virus. Keep close eyes on what's happening there as a forerunner of what will happen here more or less.

[Mark_A]

GE (and Boeing) have some risk associated with the downturn in travel, where airlines are likely going to delay delivery of planes.

[Scott W 86]

Anyone ever see Bronx Tale? Remember Mush? He liked GE, Line Energy, Sandridge, Chesapeake etc.....

[Old Wizard]

Death rates in South Korea less than 1%. You have to know that Italy has a significant older population than the US. The death rate number is very dependent on the number of people infected which I believe is the least accurate number with the biggest possible uncertainty. Extrapolation to an end point ,given that uncertainty can allow one to reach a big range of conclusions about how many will die. If you chose to use a .2% or higher death rate for the US and an infection rate like the flu it would really be unimaginable. What are your assumptions mk 1992?

[mk1992]

@Old Wizard Death rate is extremely dependent on age and not dependent much on # of people infected. Actually the very young are almost not affected. I'm using China's death rate of 15% for people aged 80. GE's LTC average age is 78? Infection rate can use anywhere from 1/3 Canada, US 40%, 2/3 merkel. This death rate won't just strike the LTC population. It will also strike the pensioners too.

[mk1992]

@Old Wizard Here's a very good interview on some head guy on this at WHO who happens to be from Canada. He threw out similar #s too, especially the 15% mortality for 80 and over (like me, quoting Chinese data). He also said mortality rate of seniors below 80 is 8%. As for population infection rate, he gave similar #s that I mentioned here. Actually he said majority of the world will catch this virus.

He also threw out one thing amazing - once in a while somebody young, 20s, 30s, 40s, total good health, catches virus and dies very fast. They don't know why yet. Darwin culling the stock.

Isn't GE's LTC-er average age 78 yrs old? How about for pensioners? Ok, who here dares to stick their neck out and do the math that I said nobody here would touch with a 10 ft pole? As I said, net net positive, measurable, and will happen fast over months. Not drag out over years.

www.bellmedia.ca/...

[User 48291705]

Still "encouraged" DJ?

When are you going tu muscle up the courage to back up your GE is great thumping?

Live and learn newbies the pitfall of chasing in DEBT to their eyeballs GE.

c ya @$5

🤙

[WSSIG]

we told you, over and over, to sweep out all your energy holdings; that GE does not belong in that industry. And what did you do ? You ignored us. ok.

We told you over and over and over and over. And what did you do ? You ignored us.
brilliant.

[User 48291705]

I keep saying c ya @$5, and even at that price GE will look overvalued.

[G. Blair Bauer]

@hangloose Hawaii ,Were you trying to sneak this one in on me? Kie and I agree the CORRECT price is $3.50.

[User 48291705]

Yeah GBB, but to hit $3.50, you need to hit 5 bucks, unless of course you use GE's accounting tricks. 🙄

[Used user]

So....why again GE didn't fully divest BHGE In Q4 and still kept some 3B$ of shares that are now losing 40%?

They never get it right
Never

[G. Blair Bauer]

@used_user ,Because they never get it right. But once they sell off a company,buy that company;they have all done well without GE's mismanagement.

[Mark Krieger]

bought more this am @ $8.40...I just can't resist a 1/2 off sale

[User 48291705]

Half off sale Mark?

When it's 5 bucks. you going to be buying more for another half off?

c ya @5

🤙

[EliasMouawad]

@Mark Krieger Historical pandemics have killed millions of people. The coronavirus killed just 4,000 ! All this hysteria is unjustified.

[User 50735431]

@EliasMouawad

Patience, Elias, they're planning on killing us shortly with their mandatory vaccine, not the flu virus itself - it's all part of the show.

[ogiedogie]

Well, let's put it this way, Tusa's predictions are coming true for all the wrong reasons. Or is Corona just a cover up for the Correction Hypothesis (CH)? CH is responding in an identical fashion to the virus fear. Why would there be a CH? Because the the world economy was due for a retracement to create the new grounds for next "leg up". Otherwise how can there be a 20% increase after the market bottom like from December 2018. Deep in the dark recesses, I suspect, central bank loosening is a sign of foreshadowing a slowdown. The rule of thumb is to throw in the towel nine months before it happens. Hmmm...that would be the election. Plenty of stimulus will hit the stage right at that point. As to who wins ? Who cares they all suck. All that matters is that if the perception warrants negative interest rates like Japan then that will become the norm. Now, irrespective of nasty Corona virus such rates are in fact indicative of a slow down. Look at 1936 when the Fed briefly raised rates in response to a tepid improvement only to cause a new depressionary threat with a subsequent market drop. Stimulus is the norm until inflation enters into the picture. Rising rates will kill this market not Corona. This is likely just another overblown correction designed to fear monger the private investor to sell into the hands of the shorts. Even TVIX got manipulated by these swings and was late in responding to the initial dive. Then they gapped it up, to play catch up. Self serving rip off artists. There are big gaps to fill to take TVIX back down but gaps on the upside everywhere else in the S&P. So when the markets turn down do we get left out in the cold or with our drawers down on the bathroom floor? Go Larry. Good call for all the wrong reasons...or did he know the economy was already on the flush side of the toiletry? Probably, because all the numbers were ripe for a correction. So, therefore, Corona is a symptom of underlying weakness not the true cause. Let's see if the Fed can "stimulus" us out of this new predicament.

[Old Wizard]

Mike I meant 100000 in the US. We know the Chinese knew about the virus at the local level at least a month and maybe longer before any action was taken. We also know that the public health system in places like China and
Iran is nowhere as good as ours. Therefore I tend to believe that the death rate compared to stated number of those infected shouldn’t be extrapolated as it has been until l we get reliable numbers from our own country.

[mk1992]

@Old Wizard Out the gate, death rates in the Western World is way higher than what China reported. Just saying..... You should go over to that part of the world sometimes. Or just watch clips on the tube on what it's like over there. They ain't got >$2T foreign reserve for nothing. US is what? $24T in the hole and counting?

[Old Wizard]

The most inaccurate of all the estimates is how many have been infected. No one can trust the
Chinese numbers. Iran at one point reported more deaths than those who were infected. Some have conjectured that the Chinese infected number could be 5 to 10 times higher. In point of fact many might have the new virus and don’t know it. The sample in this country is too small to draw conclusions, so the numbers to date are dominated by the Chinese numbers. Those of you who want to amplify the hysteria are welcomed to stay in your homes and wring your hands, my view is that even if we reach 100000 infected cases, the hysteria shouldn’t be warranted,

[Mike Slattery]

@Old Wizard

We have (world-wide) reached 102,000 infected cases and nearly 3,500 deaths.

Here is a link to what seems accurate data (Business Insider) as of March 5, 2020 - www.businessinsider.com/...

I agree with your post that the hysteria does not seem to be warranted .....so far.

[Old Wizard]

The hysteria surrounding the Caronovirus is ridiculous. Haven’t seen anything like it in my lifetime, Maryland just verified three cases, two people in their seventies and one in their.fifthies. The governor goes on TV to make the announcement, states that they are not very sick and are recovering, they are quarantined to their houses and then declares a state of emergency. Incredible! Same for California. Imagine if they did the same for the flu. CDC estimated range of 18000 to over 40000 deaths from the flu in the US last year. Imagine if we had the same hysterical response. We have a vaccine but is only 40% effective after all these years dealing with the flu. Fact is the Flu virus type is a Caronovirus form and mutates just about every year. It kills hundreds of thousands world wide. Even if this caronovirus would be shown to infect 100000 in the US instead of the 160 known cases so far, the number would be small compared to those infected by this year’s flu virus. Further while this Caronovirus is said to be more lethal to older folks, the flu is more dangerous to younger people. Just another thought, to date this virus has killed less people than the tornados recently n Tennessee. If we had the hysteria and market sell off we have as the result of this virus every time there was a tornado the market would almost be in a perpetual decline and shaking hands would almost certainly have disappeared from our culture long ago.

[iconocrass]

You need to do some reading and get out of your wild logic. Regular flu had a mortality rate of 0.1-0.3% , SARS was 10% and COVID 19 is 3-4%. Do simple math on similar infection rates as regular flu and see the number of deaths. The problem is the hospitalization rate (currently 30+ rate)...and if action isn’t taken early ...will overwhelm hospitals and healthcare system.

[itsyourmoney]

Only 95k intensive care beds in the US won't take long to overwhelm. Numbers in China were only contained by closing the whole country down.

[iconocrass]

For old wizard ...educating you a little bit. From business insider, don’t read the article ..see the chart.

www.businessinsider.com/...

[Old Gamer]

I think the air traffic down is way over done and short lived.

[G. Blair Bauer]

Throw a wrench? What about debt,power,LTC, and now Coronavirus. Don't waste time throwing them a lifejacket; let them sink. AVOID.

[mk1992]

@G. Blair Bauer You haven't seen nothing yet for the US. There's no panic yet. United is only canceling 10% of flights. Wait till panic strikes.

[markmendlovitz]

Why don't you own any GE, Daniel?

[bob.dockerty31]

Buffet should buy it for 8 per share and put another 25 bil to pay down the debt 105 bil investment. Yes ? No ?

[mk1992]

@bob.dockerty31 You have zero idea what GE's debt is made up of. Half of GE debt is industrial, that will fit your description. And half of that half will be wiped out with Biopharma and BKR stock sales. The other half of the debt, think of it as bank debt. They borrow money and lend it out at a higher interest rate to make a buck. More debt, more $ made almost. Suggest you understand the company better.

[Mark_A]

"Why don't you own any GE, Daniel?"

Daniel lost what money he had a couple of years ago in the oil patch. He now cranks out SA articles to make a living.