General Electric investors felt depressed after the industrial titan posted its Q1 earnings. Financial results were rather disappointing, and the full-year outlook also disappointed investors. Nevertheless, an alacritous correction in the stock will draw investors to the company`s stock. So, is it time to start buying the stock, or should you avoid GE after the earnings report?
First, let's briefly list the key points of the report:
- Adjusted annual organic revenue growth for the quarter was 1%, which management said could have been closer to 7% had it not been for supply chain issues, the war in Ukraine, and the coronavirus outbreaks in China.
- CEO Larry Culp decreased full-year expectations during an earnings call as he discussed the company's published full-year plans and said: "We're aiming for the lower end of that range."
- At the segment level, management reduced the full-year forecast for GE Renewable Energy and detailed supply chain disorders that pushed earnings into the second half for all four of GE's reportable segments.
- During the earnings call, CFO Carolina Dybeck Happe was asked where the sales shortfall was coming from, and she said, "It's the influence on the top line. And 5% of that is from the supply chain, and 1%, as we said, we attribute to the situation in China and Russia."
There are two approaches to looking at the current situation. From a pessimistic point of view, the company has to push back its profit expectations to the second half because of challenging circumstances (including supply chain failures and the war in Ukraine) that are far from resolved. Indeed, problems exist in all four segments.
In renewables, for example, profit margins are declining across the industry as rising feedstock costs and supply chain problems continue to negatively impact the leading players. In addition, political uncertainty surrounding U.S. renewable energy policy is delaying orders in GE's main U.S. onshore wind turbine market.
GE Healthcare declared that revenues were up 1%. That business was particularly hard hit by the disruptions mentioned above, and Dybeck Happe said: "We believe that revenue growth would have been about seven to eight points higher, or a year-over-year increase of about 9%." Management is planning price increases to help offset inflationary pressures, but they won't have a meaningful effect until the second half of the quarter.
GE Power had a relatively good quarter. Organic income was down 6% due to a decline in heavy-duty HA gas turbine shipments, but that's in line with management's plans. Dybek Happe said the segment is on track to meet its full-year estimates. Nevertheless, she also noted that Russia accounts for 4% of power sales (with relatively high margins), so sanctions will have a negative impact.
Finally, at GE Aviation, management maintained its full-year revenue growth forecast of at least 20%, based on the ongoing recovery of commercial aviation. Nonetheless, Dybeck Happe said supply chain disruptions created negative circumstances for revenue growth this quarter and are "a key factor that we are watching for during the year."
Overall, GE is under pressure in all four of its segments and even meeting the lower end of earnings guidance of $2.80 to $3.50 and free cash flow (FCF) of $5.5 billion to $6.5 billion could prove challenging.
A more optimistic perspective states that even if GE hits only the lower end of its forecast range, the stock would still have good value. For example, based on a current market value of $85.5 billion, an FCF of $5.5 billion would lead GE to an FCF of 15.5 times, whereas a factor of 20 times is reasonable for a mature industrial company.
Additionally, aviation is still in a multi-year recovery phase. GE Healthcare is still a world-class company and is able to deliver margins of at least a tenth as supply chain problems eventually subside. GE Power is once again profitable and fully in recovery mode. Ultimately, management keeps progressing on raising prices on renewable energy orders and expects the benefits to show in the second half of the year.
Pressure is building on GE as it nears dissolution in early 2023. Yet, many of its problems appear to be temporary. GE stock looks like great value only if it reaches the lower end of its forecasts. Thus, the stock remains attractive. Just watch out for geopolitical risks.
As long as the price is below the 87.90 level, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 80.20
- Take Profit 1: 72.50
- Take Profit 2: 68.00
Alternative scenario:
If the level of 87.90 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 87.90
- Take Profit 1: 93.70
- Take Profit 2: 101.50
