General Electric: The Turnaround Continues

The company is showing definite signs of recovery after management's restructuring efforts

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Apr 29, 2021
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General Electric Co.'s (GE, Financial) restructuring and turnaround efforts have continued over the past several months, but the company's results have not been too good. A slow recovery in the power and renewable energy segments, coupled with continued strength in health care, are the key drivers behind its recent performance.

GE has deeply felt the impact of the Covid-19 pandemic on its aviation segment, which ultimately weighed on the overall performance of the company. Nevertheless, there are still some positive developments to consider. The recent AerCap (AER) deal has improved the cash position of the company, allowing it to participate in the future upside of the merged entity. Moreover, management continues to make investments in health care and technology as well as reduce debt. The expected revival of the aviation industry makes me believe the long-term outlook for this industrial conglomerate is positive.

Recent financial performance

While GE's stock has had a strong upward trajectory over the past 12 months, its financial performance has been erratic. For the first quarter, the company failed to meet Wall Street's expectations with respect to revenue, but managed to produce an earnings beat.

GE reported a top line of $17.12 billion, which was a 12.17% drop as compared to the $19.49 billion reported in the corresponding quarter of 2020. The company also underperformed the analyst consensus estimate of $17.53 billion. Revenue translated into a gross margin of 21.75% and an operating margin of 2.94%, which were higher than in the same quarter last year.

The company reported a net loss of $2.8 billion, but after adjustments, its earnings were 3 cents per share, topping analysts' estimates by 2 cents. The company generated a negative operating cash flow of $1.96 billion, which was also a sign of weakness.

The AerCap deal

GE has been attempting a turnaround for a while now and has been in the process of divesting many of its businesses to refocus on its core industrial strengths. In March 2021, the company announced its plans to sell its GE Capital Aviation Services business to AerCap and ultimately bring the remaining debt and assets of GE Capital to its industrial business. This move marked a key catalyst that will allow the company to focus on its core industrial businesses: power, renewable energy, aviation and health care.

Moreover, from this deal, the company is expected to raise $24 billion in cash, plus another $1 billion in the form of a note. GE will be receiving a sizable ownership stake in the combined company, amounting to 111.5 million shares that are worth close to $6.6 billion. As per management, this transaction will help the company bring its total debt reduction target to $70 billion. Management also believes that the AerCap shares it receives may grow in value over the next several years as the global aviation industry recovers from the pandemic.

When the deal closes, GE Capital will be folded into the larger corporate structure and will no longer be broken out as a separate unit, thereby simplifying its financial reporting. This deal could be a game changer for the company.

Other key developments

As the company continues to witness the impact of the Covid-19 pandemic on its core business segments, management remains focused on bringing in new developments in order to drive growth.

In renewables, the company is expected to be supplying more than 530 turbines to North Central wind energy facilities in Oklahoma, marking it as the largest onshore wind project in GE's history.

In aviation, CFM International, the company's joint venture with Safran (XPAR:SAF), secured contracts for the leading edge aviation propulsion engine as well as service agreements from Southwest Airlines (LUV) and Scandinavian Airlines to power 100 MAX and 35 A320neo aircraft.

In health care, GE launched new ultrasound solutions, the Vscan and Venue, the industry's first artificial intelligence offering for cardiac imaging. These innovations are supporting clinicians who need fast and reliable insights at the point of care. The company holds a strong position in many imaging modalities and continues to strengthen its digital and artificial intelligence capabilities, which can enhance the personalization of diagnostics and therapeutics. The company has a number of such interesting developments that could drive growth in the future.

Final thoughts

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The share price of GE has more doubled over the past 12 months as the company has shown some positive signs of a turnaround through margin expansion. Management has undertaken initiatives to reduce the funds blocked in working capital as well as cost-cutting, which could further improve its cash position.

In terms of valuation, the company is currently trading at an enterprise value-to-revenue multiple of 1.97, which is definitely not too high for industrial conglomerates and is well below the kind of multiple that GE has traded at in the past.

GE's management is showing positive intent and there are definite signs of recovery. This is why I believe the stock could be a compelling bet for high-risk investors seeking a nice turnaround story.

Disclosure: No positions.

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