General Electric ‘s (NYSE:GE) strong fourth-quarter results show that my longtime upbeat thesis on GE stock is materializing. Specifically, despite the negative impact of the novel-coronavirus pandemic, the company’s Power and Renewables businesses are strengthening.
Meanwhile, GE’s Aviation unit is also showing “green shoots,” suggesting that the unit’s post-pandemic comeback is already underway. Given all these points, I remain convinced that longer-term investors should buy GE stock.
GE’s Power and Renewables Businesses Are Strengthening
On GE’s fourth-quarter earnings conference call, held on Jan 26, CEO Larry Culp noted that the cash flow of the company’s Gas Power unit was positive in Q4. Moreover, Gas Power’s equipment orders “more than tripled” year-over-year, driven by strength in Asia, and utilization of its gas turbines increased in “mid-single digits,” CFO Carolina Dybeck Happe reported on the conference call.
Finally, Gas Power’s backlog jumped about $700 million versus Q3, reaching $66 billion, Happe reported. And after shipping 51 gas turbines in 2020, GE, as of Jan. 26, had already obtained orders for 45 to 50 more turbines for 2021. These numbers suggest that Gas Power’s results will accelerate tremendously going forward. As I’ve noted in past columns on GE stock, it’s clear that bears’ thesis on the demise of natural gas has proven to be completely incorrect.
In Q4, Power’s total orders soared 26% YOY, while its revenue was little changed YOY, coming in at $5.38 billion. However, in spite of the pandemic and GE’s decision to stop supplying components for new coal plants, the unit’s profit rose 3% YOY to $306 million.
Turning to Renewables, the unit’s orders soared 32% YOY in Q4, powered by the conglomerate’s “onshore wind equipment orders” and the first order for its new Haliade-X offshore wind turbines. Shipments of onshore-wind equipment set a record in Q4, and Renewables’ $30 billion backlog also marked an all-time high.
Renewables’ Q4 bottom line came in at -$87 million, versus -$227 million during the same period a year earlier. The unit clearly looks set to deliver a strong, meaningfully positive contribution to GE’s bottom line in 2021.
Green Shoots in Aviation
In Q4, Aviation’s commercial aftermarket orders jumped 50% versus Q3, although they were still down 40% YOY, reported Happe. Further, the unit’s backlog slipped just 5% YOY to $260 billion, as the backlog of its LEAP engines still stood at more than 9,600. Happe also noted that the unit’s profit margin had increased versus Q3, “driven by… cost actions and improved volume in commercial markets.”
Further, Aviation’s profit margin actually rose 3.4 percentage points YOY, and its top line climbed almost 20% versus Q3. And importantly, Culp noted that GE stock’s 2021 guidance assumes that, “we begin to see the commercial aviation market recover in the second half” of the year. That indicates that the CEO, who obviously stays well-informed about commercial aviation’s trends, expects the sector to rebound meaningfully in the second half of this year. Such a forecast, of course, bodes very well for GE stock.
Analysts’ Notes Are Positive for GE Stock
Meanwhile, Bank of America analyst Andrew Obin contended recently that GE’s 2021 Aviation guidance is actually conservative. Rising interest rates would also be positive for GE stock, the analyst believes. He raised his price target on the shares to $14 from $13 and kept a “buy” rating on the name.
And in another positive note for GE stock, Morgan Stanley expects U.S. coal use to fall beginning in 2022 until it’s no longer utilized to provide any power for America in 2033. Renewable sources will generate nearly 40% of the nation’s electric power in 2030, while wind-energy generation will jump to 20 gigawatts in 2035, the firm forecast.
Using Morgan Stanley’s data, I predict within a decade from now, natural gas and renewable energy sources together will provide nearly 70% of America’s electricity, up from about 46% in 2019. Meanwhile, I expect the use of electric vehicles to meaningfully increase overall electricity demand over that period. If that scenario materializes and other developed countries undergo similar trends, GE’s Power and Renewable units should do extremely well over the next 10-15 years.
Overall, thanks to GE’s Power, Renewables and Aviation units, GE stock is poised to perform very well over the medium-term to long-term, making the conglomerate’s outlook quite bullish.
On the date of publication, Larry Ramer held a long position in GE.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.