On Wednesday, General Electric (NYSE:GE) stock surprised analysts with better-than-expected second-quarter results. With a faster-than-expected recovery already underway, GE stock has a shot at rising 20% by the end of this summer.
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The stalwart’s revenue came in at $17.7 billion vs. $17.1 billion expected, driven by more robust results in power generation and renewable energy. Losses of 15 cents per share came within a penny of Wall Street’s estimates.
Shares rose 3% in premarket trading before reversing 4% after Boeing (NYSE:BA) announced lackluster results. In the upcoming months, GE will likely stage a strong post-coronavirus recovery, creating an opportunity for investors to snag shares for cheap.
GE Stock Earnings: Seeing a V-Shaped Recovery
GE Aviation, which typically makes up two-thirds of GE’s operating income, was hit hard by the coronavirus pandemic. Utilization rates for GE Aviation were down a staggering 76% in April when passenger numbers fell over 95%. Steeper-than-expected cuts in Q2 demand caused GE Aviation to miss revenue estimates, earning $4.4 billion vs. $4.5 billion that Wall Street analysts expected. GE’s shares are down 45% since the beginning of the year, mirroring the performance of other aviation companies.
Since then, GE has reported a remarkable recovery. GE engine usage rebounded 15% in July alone, driven by improvements in both the U.S. and abroad. Chinese air travel is now just 9% lower than last year’s figures. On its 2Q20 call, the company reported a 1% year-on-year increase in backlog to $381 billion across all divisions, with 80% coming from its lucrative services segment. While the company still expects a slow multi-year recovery in aviation, the company has already seen green shoots that will send the company’s shares higher.
Source: GE 2Q20 Earnings Presentation
Healthcare: a Bright Spot for GE
After delaying capital expenses in 2Q20, hospitals are starting to re-enter GE’s core business of CT scanners and MRIs. Orders of CT scanners recovered to near-4Q baseline in July.
During the second quarter, GE also reported record orders for coronavirus-related products, such as monitors and ventilators, helping GE maintain its margins across its Healthcare Systems segment. The company expects a further ramp for Covid-19 related products in 3Q as its supply chain catches up with demand.
“We’re pretty pleased with Healthcare’s performance,” CEO Larry Culp said on Wednesday’s earnings call. “From a topline perspective, we have positive orders in HDS despite all of the downdrafts… We’ve got a good healthcare business that’s going to get better.”
What Can Go Wrong?
GE still has its work cut out for itself. The company announced two non-cash write-offs, totaling $1.7 billion during the quarter. Losses included an $839 million write-off on Milestone Aviation, a helicopter leasing business GE acquired in 2015 for $1.7 billion.
Aviation will also need a multi-year recovery, Mr. Culp warned. While the company expects further improvements in both the third and fourth quarters of this year, getting back to baseline levels would take a multi-year effort.
GE Will Emerge a Financially Stronger Company
Yet, this short-term downside presents a great buying opportunity for investors looking for a high-quality name. Between GE and its European subsidiary, the company holds a 59% market share of the world’s jet engine market. It’s almost three times the size of its closest rival, Rolls Royce. During ordinary times, GE generates a high and stable 20% operating margin from their aircraft business.
Since the beginning of 2019, GE’s management has reduced its legacy debts by $22 billion through asset sales and corporate dividend reductions. To further shore up its balance sheet, the company will sell its stake in Baker Hughes over the next three years.
The company remains upbeat on its improving financial footing. “There are a number of items that give us this confidence,” GE’s CFO Carolina Dybeck Happe said on the earnings call. “Power is a continued turnaround story. Renewables also… And with Healthcare, it’s early times for better times, with good improvement in the quarter.”
Wall Street analysts currently have an $8.22 price target on General Electric stock, suggesting a 25% potential return. GE earnings for Q2 show an industry in recovery: long-term investors should buy into GE’s high-quality jet engine and healthcare businesses while they’re still cheap.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing. As of this writing, Thomas Yeung did not hold a position in any of the aforementioned securities.
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