Big board stock boards are all low traffic on iHub. The majority of posters are busy losing their asses and learning hard lessons on pink sheet stocks. That’s why those boards are so busy.
•Investors in General Electric should expect a big year in 2020.
•The firm's recovery should really begin to take place during the year, though some risks do exist.
•The biggest could be related to its Aviation segment and Boeing's 737-Max production halt.
•So long as this issue doesn't last too long, the long-term outlook for the conglomerate is still upbeat.
With the new year here, I thought it might be interesting to take a look at one of the most interesting companies on the market, a firm that, if all goes according to plan, could do quite well for investors in 2020: General Electric (GE). For years, the firm had been experiencing consistent declines, but thanks to new leadership (starting in late 2018) and the decisions it has made, the industrial conglomerate is well on its way to recovery. With this opportunity, of course, does come some risks, and investors would be wise to weigh these before buying into the business. However, so long as these are transitory in nature, the long-term outlook of the conglomerate could be robust.
A recovery is in the works
Without any doubt, a recovery of General Electric is in the works. Management has divested of key stakes in the firm’s Oil & Gas business and its transportation operations. It is also waiting on the completion of around $29 billion in divestitures, $20 billion of which should be tied to the company’s sale of its BioPharma business to Danaher (NYSE:DHR), while the rest is due to its sale of stock in Baker Hughes (NYSE:BKR). In all, management believes that through next year it will see $25 billion in cash-based deleveraging, combined with another $1 billion to $3 billion in reduced obligations tied to pension changes.
By selling off non-core operations and focusing on streamlining what’s left, the company has been able to focus on what it believes really counts. This is why, as of the third quarter of this year at least, the firm revised higher many of its expectations regarding performance for the current fiscal year. In particular, the hard-hit Power segment should now see its operating cash flow come in at about -$2.3 billion. Though this is painful, it’s better than the continued degradation that management previously anticipated.
Moving into 2020, General Electric is primed to finally see some improvements. We still must wait and see what management has in mind on this front, but absent an economic downturn coming, it’s likely that many of the company’s segments will do better next year than they have done so far this year. This is not to say, of course, that there aren’t non-economic risks. The biggest of these is most certainly tied to whether or not the BioPharma deal does come to fruition. Fears have been circulating for months that Danaher may either back out or that a renegotiation of the transaction might occur that would be in Danaher’s favor. Neither company has said much on this front, with the last update I noticed coming from Danaher at the end of October when it said it still intends to acquire the business.
Long-term, one important part of the enterprise is its Renewable Energy business. This year, the business has been very active in winning contracts. In just December alone, the segment saw four different contract wins, all diversified geographically. One is in China, one is in Brazil, another is in the Netherlands, and the last is in Sweden. Most of General Electric’s Renewable Energy business consists of onshore and offshore (mostly onshore) wind turbines, but it does include the firm’s hydro operations as well. Investors should anticipate continued growth in Renewable Energy, though I suspect margins will remain low for a couple more years still.
The biggest risk for General Electric
General Electric offers investors with attractive prospects. Prior to the company’s major divestitures, I wrote an article detailing the company’s potential value from the perspective of a sum-of-the-parts. In short, it looks tremendously undervalued, but this is not to say that risks don’t exist. Its BioPharma sale falling through with Danaher, or being done on unappealing terms, would certainly negatively affect the conglomerate, but a bigger issue might be tied to the company’s all-star cash cow segment: Aviation.
Though Aviation has had a remarkable run in recent years, the company has been hurt by a global grounding of the Boeing (BA) 737-Max fleet. Earlier in 2019, General Electric decided to slow down the number of engines it was making from 52 units per month to 42. The impact on it in the first half of 2019 averaged $300 million in cash flow per quarter. In the second half, this grew to $400 million per quarter. Now, however, the situation has changed. Earlier this month, Boeing announced that, effective January, it will suspend all 737-Max production until it becomes clear that its planes will be given the okay to fly again.
There is no telling how long this will last. It could literally be for a few days, or it could last all of next year. This creates a lot of uncertainty because if 10 units per month could affect cash flow by $400 million per quarter, what will another 42 units coming offline do to General Electric? Assuming $40 million in cash flow per unit each quarter (so really $40 million spread across three units over the span of a quarter), the company might miss out on up to $2.08 billion in cash flow per quarter, or $1.68 billion more than what was seen in the last two quarters of 2019. Of course, that’s just a simple extrapolation. Management will need to comment to know the actual impact. Either way, this should be viewed as a significant negative for the firm until we have some guidance as to when the fleet will be operational again. Even once it does become operational, Boeing said it has about 400 planes in storage, so some time delay could occur.
Takeaway
2020 is going to be an uncertain, but likely exciting, year for General Electric. I believe that in any scenario where the 737-Max issue does not last for an extended period of time, and where we don’t see a broader economic downturn, the conglomerate should provide investors with excellent prospects. Even with these potential concerns, I see the issues at hand being short-term (last a year or less), and in the long run they will do little to affect the firm.
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