As I predicted, General Electric’s (NYSE:GE) second-quarter results showed that its comeback is continuing, but the results were hampered by temporary headwinds at its Aviation unit. As I warned, these headwinds kept a lid on General Electric stock.
The rejuvenation of the company’s power unit is strengthening and becoming quite obvious, while the problems at Aviation should be resolved soon.
As a result, GE stock price is very well positioned to advance meaningfully over the longer term. GE stock price probably won’t drop sharply going forward. Moreover, the company has a couple of other positive catalysts that could meaningfully impact GE stock down the road.
Consequently, General Electric stock is quite attractive at its current levels for longer-term investors.
Power Business Strengthening GE Stock
On GE’s second-quarter earnings conference call, CEO Larry Culp said the performance of the company’s power business, which many General Electric stock bears had essentially left for dead, was “better than expected” in the first half of the year “including better project execution, (and) orders.”
The orders obtained by the Gas Power segment of the Power unit jumped 27% in the first half of the year. Gas Power’s backlog increased 5% year-over-year (YoY) to $71 billion.
The revenue of Power’s retained businesses fell 5% YoY and its operating profit tumbled 71% YoY. Its results were dragged down by the company’s Power Portfolio unit, which largely consists of nuclear and steam power, powers which appear to be losing popularity around the world. Gas Power services revenue, which of course is obtained from servicing equipment that was sold in prior years, dropped 13% YoY.
Nonetheless, the growth of Gas Power’s forward-looking orders and backlog bodes very well for GE and General Electric stock. Culp noted that demand for natural gas in East Asia remains strong, saying, “there’s a lot of keen interest in adding gas capacity as they work through, not only their own underlying economic growth but the energy transition (to alternative fuels.)” He also noted that many countries are transitioning from coal and nuclear to gas.
Thanks to efficiencies implemented by Culp and top executives at Power, the unit has become leaner and more customer-oriented, helping its cash flow to beat the company’s prior expectations, the CEO reported. Culp noted that the unit is taking steps to raise the percentage of its parts and services that are now delivered on-time, which currently stands at 75%-80%.
GE said that it had made “meaningful progress” towards its goal of reducing Gas Power’s expenses by $800 million “over the next two years.” In Q2, the orders of all of Power’s retained businesses rose 5% YoY.
Cumulatively, the power unit’s performance was meaningfully stronger than expected, partially thanks to improved execution, enabling GE to raise its 2019 guidance for the cash flow of its industrial businesses to a range of -$1 billion to +$1 billion from its previous guidance of flat to -$2 billion.
Additionally, the company’s overall backlog jumped 11% YoY and the orders of its retained units climbed 4%, boding very well for the company’s future and for the longer term outlook of GE stock. Power’s rejuvenation sparked a 7% increase in the revenue of the company’s retained industrial businesses in Q2.
MAX Delay Dragged on General Electric Stock
GE reported that the grounding of Boeing’s 737 MAX plane, which utilizes GE’s engine, had lowered the company’s cash flow by about $600 million in the first half of the year. If the plane remains grounded in the second half of the year, GE’s cash flow will take hits of about $400 million per quarter, the company stated.
But Boeing’s CEO Dennis Muilenburg recently said, on his company’s earnings call, that he expects the plane to be retested by regulators around next month, and he stated that it could be back in service in October. Thus, in all likelihood, GE’s cash flow will not take much more than a $500 million additional hit, which is manageable, especially since Aviation had record orders at the Paris Air Show in June. The company’s overall orders and backlog has been strong and Power is rebounding.
Renewable Catalysts
Many General Electric stock bears have focused on the fact that GE obtains a large portion of its revenue from fossil fuels. But they mostly ignore the fact that the company has a relatively small, but growing renewable energy business. That business is focused on wind energy, which, like solar, is growing rapidly around the world.
Culp noted that the company’s onshore wind business is strong, while its offshore wind business has great potential. Although I previously thought that GE’s wind energy business would be hurt in the medium term by the likely upcoming downturn in the U.S. tax credit for wind energy, its onshore wind orders jumped 87% YoY, and its U.S. onshore wind orders roughly doubled YoY.
Moreover, the company’s Grid Solutions business, which is now part of the Renewables unit, should benefit from utilities’ efforts to connect renewable energy to the grid and better manage renewable energy. The business should also be boosted by grid upgrades necessitated by increased demand for electricity in developing countries that are rapidly industrializing and seeking high-tech grid management systems, and from higher orders by developed countries that are experiencing stepped-up electricity demand due to the proliferation of data centers and electric cars.
Finally, Culp noted that the Renewables unit has a small battery storage business that should benefit as they are used more frequently in conjunction with solar and wind energy.
The Bottom Line on GE Stock
GE stock has many positive catalysts, including increased demand for gas, improved execution at Power, higher electricity demand, surging wind energy demand, and strong demand for airplanes by developing countries. These positive catalysts are already boosting GE’s results, as shown by the increases in its orders, backlog, and by the hike in its free cash flow guidance.
In the wake of the company’s Q2 results, GE stock price pulled back, largely due to worries about the 737 MAX issue. But that issue looks poised to be resolved soon. After the MAX is restored to service and GE’s positive catalysts lift its results further, GE stock price should rise tremendously. Consequently, the shares are very attractive on their current pullback.
As of this writing, the author did not own shares of any of the aforementioned securities.
