Introduction
I just came cross GE stock review less than two days on Ameritrade.com. I like to spend time to learn GE business, and see how distressed business can turn into profit after coronavirus issues settle down. I like to go over CFRA stock review, and see how the report is structured.
CFRA - GE stock review
high - Analyst's risk assessment
Primary risks facing GE are cyclical demand and high
leverage, in our view. We estimate approximately 70% of
the company's revenue is generated from aviation and
energy markets that can suffer severe downturns during
recessions. The largest segment, Aviation (34% of
revenue), has particularly high risk due to the
unprecedented distress for jet engine customers during
the Covid-19 crisis, in our opinion. GE also has high
leverage, with operating earnings covering interest by an
estimated 2x in 2019, well below peer average of around
15x. The high debt burden reduces GE's flexibility to
weather downturns, in our view.
Highlights
Revenue fell 7% in Q1, with mixed performance
across segments. Renewable Energy (16% of
revenue, +26% YoY) saw a surge in sales, led by
onshore wind products benefiting from tax
incentives, in our view. This strong performance
was offset by large declines in Power (20%,
-13%) and Aviation (34%, -13%). We think
Aviation’s decline was driven by exposure to
Boeing, as GE is the engine maker for the
grounded 737 MAX. But even with MAX
production expected to resume by H2 2020, we
think Aviation revenues will move even lower
through 2021, as demand for commercial air
travel is lowered near term by Covid-19, and
lowered longer term by high unemployment, in
our view.
Power and Renewable are likely to see
downturns this year as well, although more
modest, in our view, as their power utility
clients will likely be more resilient during the
recession due to the essential nature of
electricity. We expect 2020 EPS of -$0.13, as
GE will struggle to absorb large fixed costs
associated with plants during the recession, in
our view.
In March 2020, GE sold its Healthcare
BioPharma business to Danaher for $21B.
BioPharma generated $1.3B in FCF in 2019,
which was more than half of GE’s total FCF of
$2.3B
Investment rationale/ risk
Our Hold reflects high uncertainty related to
GE's deleveraging plan brought about by the
Covid-19 crisis. Aviation and Healthcare were
GE's FCF engines in 2019, generating $4.4B
and $2.5B, respectively; against total FCF of
just $2.3B, as Power and Renewable burned
cash in 2019 despite a healthy economy. In
2020, we see virus-induced distress in
commercial air travel pushing Aviation into the
red, while Healthcare, normally a stalwart
during recessions, will see FCF more than
halved after the BioPharma sale. In our view,
the combined result could be much of the
BioPharma sales proceeds GE earmarked for
debt reduction diverted to backstop operating
losses in its industrial segments.
The upside risk to our view is Aviation making it
through the current recession without the
negative FCF we expect, which would allow GE's
deleveraging to progress mostly as planned. On
the downside, a prolonged recession, or
depression, could lead to limited debt
reduction if the industrial segments use up
most of the cash from the BioPharma sale.
Our 12-month target price is 15.4x GE's 2019
adjusted EPS -- below its 5-year P/E average
of 17x due to high uncertainty for the future
balance sheet and earning power.
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