General Electric continues to fly higher in 2023 as Aerospace business shines once again
Briefing.com
General Electric (GE) is off to a red-hot start in 2023 with shares surging by 22% year-to-date, but that strength was put to the test today after the company reported mixed 4Q22 results and issued FY23 EPS guidance that missed expectations by a wide margin. Impressively, the stock has largely shrugged off that weak earnings guidance as the positive news surrounding GE's Aerospace segment takes center stage.
The recent strength in GE shares is largely related to the company's execution of its plan to create three separately traded public companies. That plan took a major step forward on January 4 when GE spun-off its healthcare unit, which is now trading on the Nasdaq as GE Healthcare (GEHC). In 2024, GE will complete the transformation when it spins off its Power and Renewable Energy segments into a new company called GE Vernova.
At that point, GE will solely become an aerospace company, manufacturing jet engines and providing maintenance and services for both commercial and defense customers. Accordingly, the results and outlook for GE's Aerospace segment carries the most weight for investors, explaining why the stock is holding up so well despite the company's downside guidance.
Staying true to recent form, Aerospace was once again the standout in Q4 with orders and revenue both increasing by 26% yr/yr. That healthy growth was mainly driven by a jump in services revenue on higher repair shop visits from commercial aircraft. Delta Air Lines (DAL) and United Airlines (UAL) already reported strong Q4 earnings that were bolstered by robust travel demand, making the sharp increase in GE's service revenue rather unsurprising. What's really supporting the stock, in our view, is GE's bullish FY23 outlook for the Aerospace segment. Specifically, the company is forecasting mid-to-high teens organic revenue growth, operating profit of $5.3-$5.7 bln, and free cash flow that exceeds FY22's total of $4.9 bln.For some context, GE's guidance on a consolidated basis calls for high-single-digit revenue growth and free cash flow of $3.4-$4.2 bln.
GE Vernova is the main drag on the company's outlook. The Renewable Energy unit in particular has struggled due to weak orders for wind turbines. Uncertainty regarding future tax credits for wind generation has acted as an overhang on this business. On the positive side, orders rebounded in Q4, increasing by 7% to $5.0 bln, compared to the 41% plunge in Q3. Furthermore, GE is expecting business to improve in FY23, guiding for mid-single-digit revenue growth and flat-to-improving free cash flow off a ($800) mln base in FY22.
The main takeaway is that GE's overall results and outlook were far from pristine as the company continues to grapple with supply chain issues and inflationary pressures. However, the company performed well where it matters most -- Aerospace -- and its bullish outlook for that segment is offsetting less rosy news in the Power and Renewable Energy units.
