General Electric (GE) reported Q2 2023 results Tuesday morning before the open. Investors liked what they heard. As a result, GE shares are up more than 4% midway through the morning session.
GE is one of those stocks I’ve pushed into the deep recesses of my mind to avoid hearing about its ongoing struggles to become relevant again. Since Larry Culp took over the industrial conglomerate in October 2018, it’s been a rollercoaster ride for shareholders, as the former Danaher (DHR) CEO tried every trick in the book to reignite GE’s share price.
Today’s good news made me sit up and take notice that GE stock is up 117% over the past year and 65% since Culp came on board.
Could GE be ready for a revival? I think so.
Here Comes $200
The last time GE stock traded above $200 was in July 2016, two full years before Culp would take the CEO job. Before that, it was April 2008. And despite the gains over the past year, it’s down 68% from its September 2000 all-time-high of $360.67.
The company has undergone many changes during Culp’s nearly five years as CEO. The GE of today hardly resembles its business at the turn of the century.
The most significant change for GE in 2023 is that it no longer has a healthcare business. GE HealthCare Technologies (GEHC) was spun off on Jan. 4. For every three shares held, GE shareholders got one GEHC share. They currently trade around $80, up from $56 at separation.
GE hung on to 19.9% of the healthcare operation. As of June 30, it’s down to 13.5%, generating $2.2 billion from the reduction in shareholdings.
In the future, GE will separate its GE Aerospace and GE Vernova businesses early in 2024. Those will also be tax-free spinoffs. But they’re part of the company’s Q2 2023 results for now.
GE’s revenue increased by 18.5%, excluding the healthcare unit, from $13.44 billion in Q2 2022 to $15.93 billion in Q2 2023. The segment profit for GE Aerospace was $1.44 billion, 26% higher than a year earlier. GE Vernova’s segment profit was $120 million, 264% higher than a $73 million loss a year earlier.
GE Aerospace’s orders increased 37% to $9.45 billion. For the first six months of 2023, its orders were $17.66 billion, 25% higher year-over-year. Its aerospace business is ready to fly on its own.
So, for all of 2023, it expects low-double-digit revenue growth, earnings per share of $2.20 at the midpoint of its guidance, up from $1.85, and free cash flow of $4.35 billion, up from $3.9 billion.
Based on an enterprise value of $119 billion, GE’s free cash flow yield is 3.7%. I consider anything between 4% and 8% fair value and a reasonable price for the shares.
With free cash flow likely to grow stronger by the quarter, the free cash flow yield should move into this range by the end of 2023.
GE’s Wind Business Getting Better
As I said earlier, GE’s aerospace business is ready to become independent. It’s got lots of orders ahead of it. Larry Culp became the unit’s CEO in June 2022, in addition to his role as GE CEO.
Once it completes the spinoff of GE Vernova, GE Aerospace will become the new name of GE.
GE Vernova, which comprises the company’s renewable energy and power businesses, won’t be as profitable. That’s because its wind energy business continues to lose money. In the first six months of 2023, the business lost $773 million from $6.69 billion in sales.
However, there is light at the end of the tunnel. Its orders in the second quarter were $8.29 billion, more than double a year ago. Culp suggests that its margins on these orders should be considerably higher.
If that's the case, its pathway to profitability could happen sooner than investors think. The wind unit won’t make money in 2023, maybe not 2024, but it should be in the black by 2025 or 2026.
If the healthcare spinoff is any indication, current shareholders are in for a nice bump from the GE Vernova and GE Aerospace separation.
Larry Culp is excited about the future.
“GE Aerospace is growing rapidly, executing on the ramp for customers and building services strength, while GE Vernova advances toward its spin-off as Renewable Energy improves and Power continues to deliver,” Culp stated in its Q2 2023 press release.
“Each business has its own critical mission and focus. We’re increasingly operating as GE Aerospace and GE Vernova as we prepare to launch these two independent companies sometime in early 2024.”
Despite the significant gains by GE stock in 2023, 2024 should provide more once investors can more readily value both businesses independently.
You might be late to the party, but that doesn’t mean you shouldn’t stay away from GE’s revival. It’s got plenty more in the tank.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
