General Electric ($GE) is the second most traded stock of the day after Apple. With that, the share seems to have made a comeback. This is mainly due to the latest income report from the multinational. Two important statements are now important: The industrial free cash flow generation in 2020 is better than initially thought. And it increasingly appears that operational improvements are imminent at the company. Both points are critical to the long-term investment for the stock.
The operational improvements
In particular, the non-aviation activities are important among the operational improvements. Until aviation picks up again, segment profit and margins are likely to remain low. Margins in the power, healthcare and renewable energy segments improved significantly, but it is becoming increasingly clear that the market will respond to the weakness of the aviation segment. Because this segment still seems very fragile in the times of the COVID-19 pandemic, the company is shifting its focus within this segment to management. This will be optimized in the coming months so that it will be ready to respond to needs in better times.
In addition, there is the opportunity for GE to increase profits by increasing its margins in the power and renewable energy segments. The margins of the two segments are lagging behind those of their respective main competitors, which is why the company wants to focus on closing these gaps.
The third quarter has proven to be essential
In the third quarter it became clear that both segments are profitable again. It is expected that the company could generate $1 billion in FCF within a few years. The margin expansion in renewable energy is mainly due to cost productivity, better prices and volume in onshore wind in North America. The onshore wind supply has nearly hit new record volumes and the focus is now on making profitable deals, rather than being obsessed by gaining volume.
That’s why the company has started signing contracts for entry into the offshore wind market with a giant Haliade-X turbine. In doing so, the company is cleverly responding to the global shift in generating more electricity from wind and solar energy installations. Please note, the shift to renewable energy also implies that revenue growth for the gas turbine business will slow. For example, the end market for heavy gas turbines could shrink from 25 gigawatts to 30 gigawatts per year in the future. Something for which the company must find a solution within its activities.
Good returns are certainly possible
This industrial giant can still be an attractive investment option. The aviation industry is still sidelined for the time being, which gives the company more room to focus more on possible future problems in other sectors in addition to optimizing its management within the aviation industry. Forget the aviation industry for now, is the advice. Improving electricity and renewable energy trends are of more interest to potential investors as they can price some of the FCF contributions from companies within a few years.
In the long run, together with the recovering aviation industry and solid performance of the care unit, this could be a good prospect. GE could generate a good amount of FCF this way within several years. Add to that the investment case boosted by the third quarter results and it could certainly be worth considering.
Never forget to check the scoreboard
Shares were up 19.1% in October and the company’s strong third-quarter earnings report boosted shareholder confidence and certainty. The company has now reached 75% of its goal of delivering more than $2 billion in cost savings and $3 billion in cash improvements. In addition, debt has been significantly reduced by $11.7 billion, which is a sign that the company is looking forward to a very healthy status. GE plans to generate $2.5 billion in cash by the last quarter of 2020 and positive free cash flow from its manufacturing businesses by 2021.