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It's not a secret that General Electric Company (NYSE: GE) 2018 has been difficult and the results targets of management seem to be under pressure. However, for investors who are willing to look beyond the short term, the title may seem like a good value.
In this context, let's take a look at three opportunities that GE needs to take from its future.
A GE Aviation GE9X engine in development. Image Source: General Electric Company.
Improved power margin
GE certainly has work to do if it wants to reach its target of about $ 1.95 billion in profit in 2018. According to my calculations, GE should improve its energy margin to nearly 8% or more in the second half of the year. to get there, but the segment's margin was only 4.7% in the first half.
Regardless, a sequential improvement in the energy sector's margin – CEO John Flannery aims to achieve an energy margin of more than 10% over the next few years – may be enough to convince investors.
At the Electrical Products Group (EPG) conference in May, CEO John Flannery outlined three areas in which the energy industry could improve its future margin, from 5.6% in 2017 to 10% or more:
|
How does GE plan to improve its margin? |
Expected improvement (basis points) |
|---|---|
|
Reduce costs and cost base |
300 to 500 bp |
|
Maximize the value of the transactional service |
100 to 200 bp |
|
Improve equipment margins (Gas Power Systems, Grid) |
100 to 200 bp |
Data Source: General Electric Company Submissions. 100 basis points = 1%.
It is probably optimistic to expect too much equipment margins because the end markets that GE and its main competitor Siemens AG see as remaining low for the next two years.
On a more positive note, Chief Financial Officer Jamie Miller confirmed during the call in the second quarter that GE Power was on track to reduce its $ 1 billion in structural costs for the full year. 39; year.
However, the biggest difference could come from the improved performance of GE Power's transactional services. During the investor update in November, GE Power's CEO, Russell Stokes, stated that his contracted service contracts (long-term service contracts related to new equipment sales) were working well, but that GE had to repair its transactional service. Business.
As such, GE Power has focused on increasing the "visibility of transaction failures," with 75% of the installed base of small turbines being managed on a transactional basis.
In fact, Miller argued during the call of the second quarter results in July:
We have visibility on 90% of non-CSA GE units over the past year and have launched commercial actions on 80% of these units. We are striving to gain ground and win new business, with transaction revenues up 5% for the first half. We expect improvement in the second half of the year, particularly in the fourth quarter.
All in all, if GE can demonstrate an increase in energy margin through a combination of cost reductions and improved transactional services, the move to a 10% margin becomes much more obvious.
Reduced headquarters costs
GE's restructuring plan involves the company is reduced to three main activities: energy, aviation and renewable energy. Here, GE has the ability to significantly reduce business costs and focus on improving productivity in other businesses.
Indeed, when Flannery announced its plan, it also indicated its intention to reduce business costs by at least $ 500 million by 2020, which equates to about $ 0.05 earnings per share. If newly appointed board member Larry Culp helps GE to replicate the kind of business performance he has generated as CEO of Danaher Corporation, so GE investors can expect significant improvements in productivity.
Aviation on the rise
The aviation segment is expected to generate at least three times the earnings of GE Power in 2018, and more than ten times that of GE Renewable Energy. In addition, it is well known that the LEAP engine (produced by CFM International, a joint venture between GE Aviation and Saffron Aircraft Engines) is set for good long-term growth.
For reference, the LEAP engine is the only engine option on the Boeing (NYSE: BA) 737 MAX, and one of two options on the Airbus A320neo. Both aircraft are expected to dominate the narrow-body market for years to come, and GE has a great opportunity to leverage LEAP engine maintenance over the long term.
GE also has the only engine (GE9X) on the Boeing 777X – a new wide-body aircraft that, Boeing says, will drive demand for wide-body aircraft over the next decade. Indeed, Boeing's current long-term outlook calls for an increase of 8,200 global deliveries over the next 20 years – the current global passenger fleet is around 4,100.
If the success of the 777X is as important as Boeing wants, analysts may be forced to wait for long-term forecasts of earnings growth for GE Aviation. This could lead to a positive reassessment of the segment, and therefore of the entire GE – so that GE investors should closely monitor what Boeing is saying about the potential growth of 777X orders.
Delivery for GE Investors
The short-term prospects of the company are under pressure, But that does not mean that the company does not have great opportunities to improve its long-term performance. In other words, if you are willing to be patient and accept a potential disappointment in the short term, the stock could reward you in the long run.
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