Shares of GE have underperformed both the broader market and GE’s industrial peer group since the onset of the COVID-19 pandemic. The weak performance reflects primarily the company’s exposure to the aviation business, which prior to the pandemic was GE’s most profitable by far. With both the suspension of production of Boeing’s 737 Max aircraft and more recently the sharp drop in air travel due to the COVID-19 pandemic, GE Aviation’s profitability has collapsed. At this point, the consensus view, as articulated by Boeing in its 20Q2 conference call, is that air traffic will not return to pre-pandemic levels for three years. Some see a permanent reduction in air travel demand.
Consistent with its approach before the pandemic, GE remains focused on doing what it can now to respond to the challenges in its businesses. It plans to complete $2 billion of cost actions and $3 billion of cash actions this year. This is reflected, for example, in its plan to reduce headcount in its Aviation business by 25%.
GE is also aggressively pursuing product and service sales opportunities. It has recently announced significant contract wins, product certifications and product innovations across its businesses. This new potential business will not offset all of the COVID-related revenue and profit decline, but it is encouraging to see that the company still retains its competitive edge.
Besides taking cost out, improving its cash flow and pursuing new business, GE has taken steps to shore up its liquidity and extend debt maturities. In May and June, the company and its GE Capital subsidiary issued $13.5 billion of debt, $10 billion of which was used to retire debt that was coming due over the next few years. The remaining $3.5 billion was added to GE’s cash balances which totaled $41.4 billion at the end of June.
Based upon the company’s recent performance and developments in each of the business and the global economy, I project that GE’s financial performance will improve slowly but steadily in the final two quarters of the year and that the company will be profitable in 2021 in both GAAP and non-GAAP terms.
I estimate that GE will post a 2020 adjusted (non-GAAP) loss per share of $0.15, which is on the low end of the consensus range, and adjusted earnings of $0.28 per share in 2021, which is at the high end of the range.
On a GAAP basis, I project that GE will report earnings from continuing operations of $0.22 per share in 2020, due entirely to the large gain recorded on the sale of its BioPharma business in March. In 2021, I anticipate GAAP earnings of $0.06 per share. My GAAP projections do not reflect the potential for further goodwill and other impairment charges; nor do they factor in potential restructuring charges in 2021.
My projections also anticipate that GE will generate positive free cash flow in both the 2020 second half and for all of 2021. My free cash flow projection for 2020 is consistent with management’s guidance. Management has not yet provided either earnings or free cash flow guidance for 2021. If I am correct, this achievement should be viewed positively by the market, especially since some analysts have pointed to the negative free cash flow that GE recorded in the 2020 first half as a primary factor in their downbeat assessment of the company and its stock.
If Boeing’s current view of a three-year ramp back to pre-COVID air traffic volume proves to be correct, the recovery in GE’s financial performance may be slow. Yet, there should be a positive cadence to the recovery over time assuming, for example, the Boeing 737 MAX is recertified by the FAA by the end of the year, airlines put their MAXs back in the air and they begin to take deliveries of the planes that they have ordered. Likewise, the improvement in air travel, though perhaps gradual, should build expectations of improving performance for most companies with airline industry exposure, including GE.
(This is a summary of a detailed update report on General Electric. Please contact me directly to get the full report.)
October 8, 2020
Stephen P. Percoco
Lark Research
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