Spoiler alert: General Electric's (GE +1.96%) stock is worth buying.
I'm giving away the ending now because the same investors I'm saying are safe to buy the stock also need to understand that, after seeing the company's fourth-quarter earnings and outlook, the recurring theme for 2023 will be patience. Across all three segments (the healthcare segment is now listed separately as GE HealthCare Technologies), it's a case of profit and cash flow headwinds in 2023. The reasons behind the headwinds are what is setting up the company for improved long-term growth.
NYSE: GE
Key Data Points
A look at General Electric by segment
GE Aerospace is the company's most substantial segment, and it's the one that beat management's guidance in the fourth quarter. Overall guidance for 2023 though appears to be a little weak on a headline basis. Looking back at the investor day presentation given in March 2022, management told investors to expect earnings of $3.8 billion to $4.3 billion and free cash flow (FCF) of $4.6 billion, which will be down slightly from 2021. The 2023 guidance in that March report called for $6 billion in earnings and improved FCF.
Ultimately, GE Aerospace sailed past the 2022 guidance with a profit of $4.8 billion and FCF of $4.9 billion. However, the updated guidance for 2023 now calls for just $5.3 billion to $5.7 billion in earnings, with FCF "up." On a superficial basis, it's disappointing earnings guidance for 2023, but here we see a positive headwind (pardon the oxymoron).
Engine suppliers need to ramp up production in order to help ramp up airplane production. For reference, GE Aerospace's joint venture with Safran, CFM International, is the sole engine provider (the LEAP engine) on the Boeing 737 MAX and one of two on the Airbus A320 neo family. However, airplane engines tend to lose money when initially sold, only to generate decades worth of higher-margin service/aftermarket revenue afterward.
As you can see in the chart, GE Aerospace is ramping production (having sold 845 units in 2021 and 1,136 in 2022), and it expects to increase deliveries by a whopping 50% in 2023.
|
GE Aerospace |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
LEAP Sales (units) |
220 |
239 |
226 |
347 |
324 |
Data source: General Electric presentations.
While the ramp-up in engine production will peg back profit margins and profit, investors can rest assured that aviation spares sales continue to surge alongside the recovery in commercial aerospace.
Data source: General Electric presentations.
GE Renewable Energy had a rough 2022
The segment's problems in 2022 can be seen in this guidance table. Earnings come in worse than expected in 2022, but the guidance for "significantly better" earnings in 2023 doesn't mean a lot when it's a comparison based on a loss of $2.2 billion in 2022.
|
Guidance |
March Guidance for FY 2022 |
October Guidance for FY 2022 |
Actual 2022 |
FY 2023 Guidance |
|---|---|---|---|---|
|
GE Renewable Energy |
($0.7 billion to $0.5 billion) |
($2 billion) |
($2.2 billion) |
"Significantly better"; FCF "flat to improving" on the $2 billion outflow in 2022. |
Data source: General Electric presentations
That said, the three businesses that comprise the segment (onshore wind, offshore wind, and grid) are all forecast to improve through 2023. Onshore orders in North America "more than doubled" in the fourth quarter, and CEO Lawrence Culp expects them to grow by 50% in 2023. Culp said, "We also expect a significant step-up in profit driven by lower warranty and related reserves, better price, and restructuring benefits."
This confirms the improvement in order pricing seen elsewhere. If warranty reserves do indeed improve, it implies that GE feels confident it won't suffer the kind of execution issues currently bedeviling Siemens Gamesa. With management being more selective over onshore orders, 2023 should be a better year.
Offshore wind is a budding business for GE. It was only a $0.5 billion revenue business in 2022, but Culp expects it to more than double in 2023, and management previously made plans for $3 billion in 2024. Here again is a positive headwind. According to Culp, margins on its key projects "will be challenging between typical new product margins and inflation resulting in rising losses." These are the growing pains this segment is trying to work through.
On a more positive note, the grid business (switchgear, transformers, grid automation, and grid software) turned profitable in the fourth quarter after losing $400 million in 2021. It is expected to be modestly profitable in 2023.
GE Power did well in 2022 but 2023 guidance disappoints
The segment's full-year earnings of $1.2 billion came in at the high end of the $1 billion to $1.2 billion guidance in March, and full-year FCF of $1.9 billion was excellent.
The guidance for low-single-digit revenue growth, a slight improvement in profit, and lower FCF is slightly disappointing. Still, as with GE Aerospace, there's a negative margin mix impact with relatively more equipment revenue, as GE Power delivers more heavy-duty HA turbines in 2023.
A stock to buy
All told, management is guiding toward high-single-digit revenue growth and $3.4 billion to $4.2 billion in FCF in 2023. The midpoint of the FCF guidance puts GE on a forward price-to-FCF multiple of around 23 times, but management has proven to be conservative on guidance, and for the reasons outlined above, earnings/FCF will be held back in 2023.
After a powerful recent run, the stock isn't cheap on a 2023 basis, but the actions taken this year (including LEAP, offshore wind turbine, and HA gas turbine deliveries) are setting up the company for long-term growth. Investors should look out for commentary on 2024 in the March update.
