Source: PaxForex Premium Analytics Portal, Fundamental Insight
General Electric's upcoming earnings report is unlikely to bring any major surprises. After all, management usually gives broad forecasts, and CEO Larry Culp spoke at length about trading conditions at a conference in mid-September. However, the heart of the matter lies in the details. Investors will be very interested in putting the pieces together and building a picture for 2022 and beyond. Here's what to expect from GE when it reports earnings on Oct. 26.
GE's full-year outlook for 2021 calls for low single-digit earnings growth, 250 basis points (where 100 basis points equals 1%) margin expansion, adjusted earnings per share of $0.15-$0.25, and free cash flow (FCF) of $3 billion to $5 billion.
Culp pointed out to investors that GE has a goal of achieving high single-digit FCF margins by 2023, which means about $7 billion FCF - a significant figure given that the company has a market value of only $114 billion.
Given how broad the FCF benchmark is for 2021, and the fact that Culp told investors in mid-September, "Keep believing in continuing that benchmark," GE is likely to keep it. However, there is some debate about whether management will shift expectations toward the high or low end of the range. One of the main concerns about FCF concerns GE Renewable Energy.
During a second-quarter earnings call, Chief Financial Officer Carolina Dybeck Happe said that the "biggest variable" for GE's cash flow is related to its renewable energy business.
The uncertainty has to do with whether the production tax credits (given for electricity produced by renewable energy sources) in Biden's infrastructure bill will be extended long term. If the deadline is extended, consumers may defer some investments. On the other hand, if there is no extension, investments may be delayed. Also, more important is how consumers feel about the issue.
Nevertheless, if GE does move FCF expectations to the lower end of its range because of problems with the extension of the production tax credit, it is not a serious cause for concern. After all, extending the tax credit implies longer-term growth for GE.
More troubling is that GE's two main wind energy competitors, Siemens Gamesa and Vestas, have lowered full-year earnings expectations amid rising costs and supply chain problems. So it's hard not to think that GE Renewable Energy will also face some challenges.
GE Power is perhaps the most intriguing segment in the third quarter. This period tends to be a weaker one for it because it's usually a time of lower power outages in the Northern Hemisphere. This means that GE's higher-margin services tend to decline.
This year, however, there has been no shortage of anecdotal evidence of inclement weather causing outages. Consequently, this year's third quarter may be better than expected for GE Power.
In addition, there was some speculation that GE might sell its nuclear steam turbine business. However, at the Morgan Stanley Laguna Conference in mid-September, Culp said that new GE Power CEO Scott Strazik is going to "accelerate the restructuring of our steam business, I think that will help all of us."
It will be interesting to hear what management has to say about the future of the steam business and Strazik's plans.
In early September, GE Vice President of Investor Relations Steve Winoker said in an investor update that the company is sticking to its full-year outlook for GE Healthcare, which calls for low to mid-single-digit revenue growth and a 100 basis point margin increase. Culp later reiterated his confidence in meeting the margin-increase goal.
So it would be an unpleasant surprise if GE changes its 2021 health care projections. That said, Culp also noted significant supply chain challenges, and Winoker said the situation would remain "challenging" in the first half of 2022.
The main thing to pay attention to is what management is saying about 2022, and in particular, whether there is a risk of losing market share in the face of, in Culp's words, "strong, if not solid," demand.
To be blunt, there's little GE management can do about the departures that define GE Aviation's business, and the market is well aware of what's happening with the resumption of international air travel.
So it is more interesting to focus on what GE says about its much smaller military business. For example, the military business had $4.6 billion in revenue, compared to the segment's total revenue of $22 billion in 2020.
Winoker previously said the business faced production problems this quarter because of supply chain issues, so it will be interesting to see if management maintains the military business' high single-digit revenue growth target in 2021 and through 2025.
Overall, the basic outlook looks safe. Nevertheless, there are near-term unfavorables (notably supply chain issues in healthcare and military aviation) and one-time negative impacts (renewable energy production tax credit extension). On a more positive note, however, GE Power may surprise in the form of growth.
Nevertheless, more important for investors to focus on management's comments about underlying demand in health care and renewable energy, GE Power's ongoing restructuring, and the ongoing, albeit inconsistent, recovery in commercial aircraft departures. As long as these strategic earnings drivers remain in place, investors shouldn't worry too much about a tough quarter or two.
As long as the price is above the 99.20 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 104.80
- Take Profit 1: 110.40
- Take Profit 2: 113.20
Alternative scenario:
If the level of 99.20 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 99.20
- Take Profit 1: 94.50
- Take Profit 2: 91.60
