GE Capital began as a basic finance company in 1932 in order to help customers finance their purchase of General Electric (NYSE:GE) appliances. Financing refrigerators, washers and dryers may have been innovative at the time, but back then they had no idea what was coming and how it would affect GE stock.
Under CEOs Jack Welch and Jeff Immelt, GE Capital assets grew to $160 billion by 1995, $332 billion by 2000, and $637 billion by 2008. By 2014, GE Capital was the seventh-largest bank holding company in the U.S. The following year, Immelt began the dismantling of this empire.
The announcement in March 2021 that GE was selling/merging its giant commercial aircraft leasing business to competitor AerCap (NYSE:AER) may have written the final chapter for GE Capital. Post-closing, GE’s finance arm will have a mere $65 billion in assets ($17 billion if you exclude insurance run-off assets) and will be consolidated into GE’s overall industrial financial statements.
Having to deal with two separate balance sheets and income statements have frustrated analysts for decades.
What’s left will be an almost pure play industrial company poised for growth, something that has eluded GE for a long time. The “new” company will be focused on four distinct segments – Power, Renewables, Aviation and Healthcare.
Primarily consisting of giant industrial gas, steam, or nuclear related turbines, this was one of the stalwart growth engines of GE for decades. In recent years this segment has been troubled due to the rise in renewable energy generation and the decline of the coal business.
Although growth will be roughly flat this year and next, the long-term story of electricity generation in emerging markets still should come into play. In addition, these massive turbines have a substantial service component over time which provides a decent level of recurring revenues far into the future.
This segment is driven by massive onshore wind turbines but also includes hydro power products, solar products and services, and electric grid offerings as well. This segment, with over $15 billion in revenues is not currently profitable as GE continues to invest in the fast-growing renewable energy future.
However, margin improvements should continue for the foreseeable future. This may be a key driver of future growth for GE if the renewable energy concept continues for electric utilities.
GE Aviation provides aircraft engines, systems and avionics to both commercial and military aircraft. The engine market is essentially an oligopoly between GE, Rolls-Royce, and Pratt & Whitney, a subsidiary of Raytheon Technologies (NYSE:RTX).
This segment suffered in 2020 as airplane manufacturers and airlines suffered substantial business disruption due to the absence of travel resulting from the Covid-19 pandemic. The company expects a recovery starting in the first half of 2021 as well as expanded growth in the military market. Like the Power segment, Aviation has a substantial component of service revenues attached to each sale. Last year, service revenues were 60% of the segment while actual equipment sales were 40%.
If there was a crown jewel of GE’s portfolio, healthcare would be it. Primarily know for MRI and CT Scan equipment, they also provide ultrasound equipment, ventilators, and a variety of healthcare IT offerings.
With good top-line revenue growth and mid-teens operating margins, healthcare will drive GE’s growth until the Power segment recovers and the Renewable segment turns profitable. GE Healthcare generates billions in much needed free cash flow. On a stand-along basis, GE Healthcare could be worth $60 billion, or half of GE’s current market cap.
CEO Larry Culp
Legendary may be a strong word for Larry Culp who took over as CEO in September 2018, but for shareholders of Danaher (NYSE:DHR), that may not be an overstatement. Culp led that company from 2000 to 2014, a period in which the stock climbed over 500% and grew the company into a well-respected and diversified manufacturer of medical, industrial and commercial products.
Culp has been charged with not only turning around the troubled aspects of GE but also delivering the balance sheet and more importantly – growth.
Back to Industrial Roots for GE Stock
As GE returns to essentially being a pure industrial company, the perspective by investors should change. Earnings per share is expected to grow 100% in 2022 and perhaps 50% in 2023 according to analysts estimates.
It’s no longer a turnaround story, no longer a value stock, but if Culp can pull the magic he did at Danaher, then it becomes a real growth stock. Who knows, one day GE stock might even catch the attention of the Reddit crowd.
On the date of publication Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.