General Electric Stock: Solid Results For A Solid Firm (NYSE:GE)

Before the market opened on January 24th, the management team at industrial conglomerate General Electric (NYSE:GE) announced financial results covering the final quarter of the company’s 2022 fiscal year. Although companies report financial results four times per year at a minimum, this particular release was memorable because it marked the final quarter in which the company’s healthcare operations remained on its books for an entire quarter. The data revealed by management definitely came in mixed in some respects. But for the most part, it demonstrated just why the company represents a fantastic opportunity for long-oriented, value-focused investors.

Solid news

To start things off, we should touch on some of the headline news items released by management. The first would be the revenue the company generated. During the final quarter, sales came in at $21.79 billion. While this represented an increase of 7.3% over the $20.30 billion reported for the final quarter of the 2021 fiscal year, the sales reported by management, unfortunately, came in $310 million below what analysts were anticipating. While this is disappointing to see right out of the gate, it is important to note that the company suffered significantly from foreign currency fluctuations. Without this and after factoring in some other minor adjustments, sales for the company would have grown by 11.2% year over year. In fact, all things considered, you could argue that adjusted sales for the company would have been $392 million higher than what analysts expected.

This increase in sales was driven by growth across three of its four operating segments. GE Aerospace, which covers all of the company’s aviation operations, saw revenue total $7.62 billion during the quarter. This is 25.2% above the $6.08 billion generated the same time one year earlier. Continued growth in the company’s Commercial Services from higher internal shop visits and strong external spare parts sales were instrumental in pushing revenue up higher. The company also benefited from growth in its commercial engine business thanks to higher LEAP unit deliveries, while military revenue for the company also benefited from increased demand. Is worth noting that orders under this segment also performed very well. During the quarter, they came in at $9.68 billion. This compares favorably against the $7.71 billion reported one year earlier. This helped total orders for all of 2022 in its entirety come in at $31.11 billion compared to the $25.59 billion reported for the 2021 fiscal year. This was also the driving force behind the company’s backlog growing 12% year-over-year to $478.2 billion, with GE Aerospace backlog alone shooting up 16%.

Another segment that experienced growth during this time was the Power segment, which is one of the two business units (the other being the Renewable Energy segment) that will be spun off next year as part of what will be called GE Vernova. Sales of $5.03 billion came in slightly above the $4.66 billion reported the same time during the 2021 fiscal year. Higher aero-derivative units and transactional services growth under the company’s gas power operations helped to push revenue up around 8%, with organic revenue growth of around 12%. And just as was the case with the aviation operations, orders for Power also increased, rising from $4.31 billion in the final quarter of 2021 to $5.44 billion around the same time in 2022. This allowed the company to finish the year off strong, without which orders would have risen only 2.3% year over year compared to the 8.6% the firm ultimately reported.

And the final segment that reported growth was GE HealthCare Technologies (GEHC), which has since been spun off into its own publicly traded entity. Sales of $4.97 billion came in higher than the $4.63 billion reported one year earlier. However, orders under this segment did decrease some for the final quarter, dropping from $5.30 billion to $5.28 billion. But that didn’t stop overall orders rising for the year, climbing from $19.60 billion to $19.86 billion. The only segment for the company to actually worsen was the Renewable Energy segment. Sales fell from $4.19 billion in the final quarter of 2021 to $3.41 billion in the final quarter last year. This plunge of 18.6% was driven largely by a 13% fall in organic revenue thanks to lower volume in the onshore wind operations and lower repower upgrades from customers. Fortunately, though, the worst the pain seems to be in. Although orders for the 2022 fiscal year as a whole plummeted from $18.16 billion in 2021 to $14.66 billion in 2022, orders in the final quarter managed to climb 3.7% from $4.85 billion to $5.03 billion.

On the bottom line, the company managed to report earnings per share of $1.24 on an adjusted basis. On top of beating the $0.82 per share in adjusted earnings reported the same time one year earlier, the amount reported by management also beat analysts’ expectations by $0.08 per share. The rise in profitability also resulted in higher cash flows for the company. For the quarter on its own, free cash flow for the company came in at around $4.3 billion. That’s up from the $3.7 billion reported one year earlier. For the entire 2022 fiscal year, free cash flow of $4.8 billion crushed the $2.7 billion generated the same time a year earlier. It should be said, however, that if we remove GE HealthCare from the equation, the picture does look different. Overall organic revenue for the year would have risen by 6%, while earnings per share on an adjusted basis would be $0.77. Free cash flow, meanwhile, would come in at $3.1 billion.

Now would certainly be a good time to talk about some other interesting developments. At present, management has some pretty high hopes for the 2023 fiscal year. The GE Aerospace segment, for instance, is expected to grow at a mid to high teens rate, with free cash flow for this segment expected to rise by an unspecified amount. The growth here should be attributable to robust commercial services and engine growth and high single-digit military growth. At the same time, the two operating segments that comprise GE Vernova should grow at a low single-digit to mid-single-digit rate. Free cash flow should, at worse, remain flat. But there is a chance it could improve modestly. With all the cash flow the company has managed to generate, it has not hesitated when it comes to reducing debt and buying back stock. During the 2022 fiscal year as a whole, the company managed to reduce debt by roughly $11.1 billion. This brings total debt reduction since 2018 to more than $100 billion. It also spent approximately $1 billion buying back stock, with a total of 13.3 million shares repurchased. Of these, 4.2 million were bought back in the final quarter of the year.

Moving forward, management appears to have high expectations for the future. For 2023, excluding GE HealthCare, Organic revenue should rise at a high single-digit rate. This should be driven by growth from the GE Aerospace segment at a rate that is in the mid to high teens and by organic growth under GE Vernova at a rate that is in the low to mid-single digits. Overall free cash flow for the year should be between $3.4 billion and $4.2 billion, while adjusted earnings per share should come in at between $1.60 and $2. Given that shares of the company are trading at $80.26, hitting the midpoint for earnings would imply a rather lofty price-to-earnings multiple of 44.6. But given the free cash flow figures, the multiple should be lower on that basis at around 23.2. If we assume that capital expenditures will be roughly the same as they were in 2022, once again excluding GE HealthCare, the price to adjusted operating cash flow multiple would be around 18. Of course, this picture is oversimplified since the conglomerate is still rather complex. After all, in addition to owning 19.9% of GE HealthCare, an investment that’s currently worth $6.3 billion, the company also has ownership stakes in both Baker Hughes (BKR) and AerCap Holdings (AER), which are worth, combined, billions of dollars. An effort would be made to strip all of these out of the equation. But management has not yet released the company’s 10-K that would make this possible.

Takeaway

Based on all the data provided, I can only say that I was mostly pleased by the results posted by General Electric. The company did quite well, even though it missed on sales. But that miss in terms of revenue came in the best form possible: foreign currency fluctuations. Moving forward, the firm seems to be on solid footing, and cash flows are expected to rise. It was also great to see orders increase for three of the four major operating units of the enterprise since orders are ultimately the best leading indicator for the business today. As more data comes in over the next couple of quarters, I’m going to continue to ask myself when a good time to sell my own stake in the company would be. The spin-off occurring in 2024 could prove to generate some additional upside for shareholders moving forward. But I now have to balance out the opportunity presented not only by General Electric, but also by the tremendously undervalued GE HealthCare enterprise. For now, I’m keeping my ‘strong buy’ rating on both companies. Though I may rebalance some holdings in my portfolio to some degree.