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COVID-19 Sinks General Electric's Moat

May 04, 2020 9:51 PM ETGeneral Electric Company (GE)24 Comments
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  • GE's Q1 revenue and segment profits fell by double digits Y/Y. Aviation's segment profits fell 39%.
  • COVID-19 has caused air travel to free fall. Aviation orders are falling, and margins are shrinking. Aviation was expected to be a moat.
  • Cost cuts at Aviation imply the unit is battening the hatches amid an uncertain outlook for air travel.
  • FCF was -$2.2 billion. If FCF continues to fall, it could hamper GE's ability to service its $85 billion debt load.
  • COVID-19 appears to have sank GE's moat. Sell the stock.
  • Looking for a helping hand in the market? Members of Shocking The Street get exclusive ideas and guidance to navigate any climate. Get started today »

Source: BarronSource: Barron's

General Electric (NYSE:GE) reported Q1 revenue of $20.52 billion, Non-GAAP EPS of $0.05, and GAAP EPS of $0.72. The stock is down in the low-single-digit percentage range post-earnings. I had the following takeaways on the quarter.

NewCo Loses Traction

GE's top line has included noise from the constant buying and divesting of companies. I have long-held the suspicion its industrial businesses have peaked. Aviation, Power Systems and Renewable Energy (NewCo) are considered core operations. In Q4, NewCo showed traction, growing revenue 3% Y/Y. In Q1 its revenue fell 7%. Revenue from Power and Aviation fell hard, while Renewable Energy bounced by double digits.

Q1 2020 Revenue

About 29% of total revenue was derived from Power, down from 31% in the year earlier period. Power has been a poor performer for a few years, but last quarter, the unit's revenue appeared to have stabilized. In Q1, Power's revenue fell 13% Y/Y. COVID-19 has had a negative impact on Power's supply chains and hampered its ability to close transactions. Lower oil prices and a dismal economy could negatively impact customers' budgets. This implies Q2 results could worsen.

Revenue from Renewable Energy bounced 26% as the onshore wind market benefited from the Production Tax Credit ("PTC") and a shift in customer preferences to larger, more efficient units to help lower costs. Onshore wind reported record deliveries in Q4, and management projects solid deliveries for much of 2020. The PTC has been a boon for the segment as previously predicted.

Aviation revenue fell 13% Y/Y, which followed a 6% rise last quarter. Aviation was expected to be NewCo's moat. The knock-on effects of COVID-19 may have changed the narrative. COVID-19 has led to social distancing and shelter-in-place orders. This has led to a free fall in air travel, demand for planes and aircraft engines. Airlines have grounded their fleets, while others have ceased passenger operations. According

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

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