General Electric (NYSE:GE) has found itself in choppy waters since mid-August after a report issued by accounting investigator Harry Markopolos suggested that the conglomerate is on verge of insolvency. The accounting expert went on to claim that the company has been following malicious accounting practices and is hiding serious financial problems. This did not help investor sentiments, given that the SEC and the DoJ have been investigating GE’s accounting policies since late last year. GE’s stock tumbled 14% following the report, but has recouped most of its losses over recent weeks due to broader market gains.
While the allegations present a significant downside risk to GE’s valuation, we are reiterating our $12 price estimate for GE’s stock as we believe the company is on course to restructure and revive its business. We takes a detailed look at the potential outlook for the company and some of the trends that could impact its valuation in our interactive dashboard. In addition, here is more Trefis Industrial company data
Key Factors That Could Impact GE’s Valuation
Power Segment Will Continue To Improve
- The company’s power business has been struggling of late, with revenues shrinking 22% in FY 2018. Power markets have faced challenges as a significant overcapacity in the industry has led to reduced utilization of the company’s power equipment.
- However, this segment has shown signs of improvement so far this year. The company’s gas power business is thriving as indicated by the fact that the orders were up 28% organically during Q2, bringing total gas turbine units orders to 35 in the first half. Moreover, the company is right-sizing its business by reducing additional fixed costs.
- Despite these improvements, GE’s management stated that they are only in the initial stages of turning around the Power segment, and the ongoing profit and cash pressures from legacy contracts will continue to adversely impact this segment.
- Moreover, market factors such as increasing energy efficiency and growing share of renewable energy source will continue to weigh on the demand for GE’s power products in the near term.
Aviation Segment Will Continue To Be The Key To GE’s Long-Term Growth
- Aviation is the company’s most valuable business – accounting for roughly 25% of the company’s revenues, and almost 45% of its operating profit in 2018. The segment’s year-to-date performance has been robust, with revenues growing by 8% to $15.8 billion.
- These gains have been led by higher commercial engine growth and continued momentum in the LEAP engine program. LEAP engines have been the largest growth driver for the company’s Aviation division with GE shipping over 1,100 CFM International LEAP engines in 2018.
- Going forward, we forecast the Aviation segment revenues to increase in the mid single-digit range thanks to healthy growth in air travel globally, improved global defense and military spending, as well as increased shipments of the more efficient and cost-effective LEAP engines.
- The segment’s profitability is also expected to improve slightly due to increased price, increased volume, and higher spare engine shipments.
Healthcare Segment Will Continue To Achieve Steady Growth
- Healthcare segment has achieved steady growth since 2016 – adding more than $1.5 billion to total revenue at an average annual rate of 4.3%.
- But the Healthcare segment had a rather soft first half of 2019, with revenue remaining flat at $9.6 billion, even though orders were up marginally.
- Going forward, we expect this segment to grow in the low single-digit range driven by growing demand in developed and emerging markets for Healthcare Systems and continued growth in both biologics and contrast agents in Life Sciences
Planned Divestitures Should Improve GE’s Cash Position
- During Q2 2019, GE completed the spin-off and subsequent merger of its Transportation segment with Wabtec Corporation, helping the company generate $2.8 billion in cash. Moreover, the company generated another $1.8 billion in cash by selling 25.3 million shares received in the merger.
- GE also plans to sell its Biopharma business which should help GE generate another $20 billion in cash.
- Taking all into account, additional cash proceeds should help GE reduce its debt and its swelling leverage ratio
Per Trefis estimates, GE’s adjusted EPS for 2019 is likely to be $0.52. Taken together with a P/E multiple of 22x, this works to a fair value of $12 for GE’s stock which is roughly 25% ahead of the current market price
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Data
Like our charts? Explore example interactive dashboards and create your own