General Electric Company

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

A global industrial company that provides a wide range of equipment, software, and services for its core end-markets, primarily the aviation and healthcare industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

General Electric’s long history, iconic brand, and strong position in many industries make it worthy of further analysis.

GE has made many changes over the last years, selling many of their businesses and refocusing.

Business Overview

General Electric (GE) operates across four main segments:

  • Aerospace: This is GE’s most profitable and most stable segment. They manufacture commercial and military aircraft engines, integrated engine systems and related services. Revenue is derived primarily from services and maintenance of their engines.
  • Healthcare: This business unit focuses on precision diagnostics and connected care solutions, medical imaging, imaging technology, drug discovery, biomanufacturing, and patient care.
  • Renewable Energy: GE provides renewable energy solutions, both on- and off-shore; they engage in areas of wind power generation, manufacturing wind turbines, and battery storage, including design engineering, and project management.
  • Power: This segment is involved in gas power generation, where they provide equipment, services, and solutions across the energy value chain. They design, manufacture, and service gas turbines, steam turbines, and generators.

GE is actively undergoing a restructuring of their business. All other non-core operations are being divested.

GE operates in many areas, and each of them is different. So the competitive landscape in each business area differs.

  • Aerospace: This is a strong industry with few players and is mostly dominated by Boeing and Airbus. The key is technology innovation, supply chain strength, and strong relationships with aircraft manufacturers.
  • Healthcare: Here we see a lot of innovative new technologies and drugs. The key to success here is research and development (R&D) ability, brand recognition, and regulatory approvals.
  • Renewable Energy: The industry is growing fast but is dominated by a few main players and is heavily influenced by government regulations and environmental policy.
  • Power: The energy market has been affected by the move to greener sources, with a high emphasis on gas plants. The competition here is mostly defined by technology and efficiency.

Moat Assessment

I am giving GE a moat rating of 2. There are certain things that give the company some competitive advantages but it isn’t anything impenetrable.

  • Intangible assets: The company has a strong brand name, particularly in its aviation and power businesses. Also, the company has been around for 100 years, so it is easily recognisable and provides a sense of security. This can create a narrow moat. The company also holds several patents and proprietary technologies, especially in their healthcare division, adding to their limited competitive edge.
  • Cost Advantages: The company benefits from large-scale economies in their manufacturing process as they have enormous production plants; these are really costly to duplicate, and so give GE some edge over competitors. However, competitors can find better production techniques and become more cost-efficient.
  • Switching Costs: Especially in the aerospace field, customers rely on GE parts because of its well-established supply chain and proven safety track records. This creates substantial switching costs.

However, many areas of its business face intense competition, which may result in the inability to maintain profitability over long periods of time, lowering its moat strength.

Some of GE’s businesses, particularly Renewable Energy and Power, are facing very tough competition and have been struggling to get a decent ROI, reducing its profitability.

Business Resilience and Risks

  • Technology Disruption: Rapid technological advancements could affect GE in many ways, such as cheaper alternatives, new innovative products from competitors, or new products that make obsolete old lines of business. They do have high levels of research and development, which helps them to make new and superior products and keep up with competition.
  • Economic Cyclicality: Some segments are particularly subject to economic downturns, especially Aerospace and Power. They may suffer a lot during such times.
  • Dependence on Government Contracts: While providing stability, reliance on government contracts can create some political risk. Budget cuts, or changes in regulations, could negatively impact these sectors.
  • Commodity Price Risk: There has been much market volatility in areas like oil and gas, and this could effect the input cost for power businesses. Also, fluctuations in raw material costs can also impact the business.
  • Macroeconomic conditions: Macroeconomic conditions and related instability, including recessions or inflation, can affect the business negatively.
  • Supply chain: Their operations are heavily reliant on supply chains and they have had issues as of late.
  • Cybersecurity: Increasing cybersecurity requirements, vulnerabilities, threats, and more sophisticated and targeted cybercrime all pose risks to the business.

While having a very diverse and reliable business, GE faces many challenges, but they have proven to be adaptive and resilient over time.

Financial Analysis

From the latest reports, GE is working towards increasing free cash flow and reducing its debt position. From their financial reports we find out:

  • Revenue: They had revenues of $16.9 billion, up 3% from the same period last year.
  • Profit: Their net loss was $167 million, and although they had an increase in revenues from last year, the profitability of the company has not changed materially.
  • Free Cash Flow: The company had $1.5 billion of free cash flow, which is their focus, showing improvements in their underlying operations, but as mentioned, profitability continues to remain shaky.

Going into more detail, we find the following information:

  • Revenues: Increased year over year by 3%, but that was mostly due to growth in commercial engine sales, which is a more reliable business unit. Other divisions have not shown much improvements. Also, it is noteworthy to mention that healthcare revenues declined by about 1% because of lower volumes.
  • Margins: There has been slight improvements in overall margins because of cost reductions. But as mentioned, the margins are still not good enough.
  • Capital Allocation: GE has been increasing investments in R&D by 14%, showing commitment for technology improvements.
  • Debt: The company’s net debt levels are quite low and they have almost no long-term debt to worry about.
  • Free Cash Flow: The company generated about $1.5 billion in cash flow, mostly from improvements in the power and aerospace segments. They are focusing on long term value creation and using these cash flows for improving their business and potentially returning it to shareholders in the future.

GE has been focused on growing its Aerospace division, a very dependable business with a steady income source and less reliance on economic and market forces.

The management seems to have a good focus on improving profits and financial performance of the company.

Understandability

GE’s business is quite complex because of different operations. While the aviation business is easier to understand because it mainly involves sale and maintenance of aircraft engines, other areas are more complicated. Hence I’m giving it 4/5 on understandability.

  • Business Complexity: GE operates in various industries, and there are many divisions in each, leading to complexities in tracking each, as well as understanding the business as a whole.
  • Accounting: It is difficult to make good predictions because of how GE is structured and how its accounts are structured.
  • Technological Challenges: The company is in areas prone to technological innovations, and this can make understanding the future of the business very difficult and often complicated.

Balance Sheet Health

While GE is not in a dangerous situation, it still does not have the best balance sheet, as their free cash flow and revenue numbers do not impress, and hence I am giving them a 3.

  • Debt Levels: The company’s total debt and financial risk has decreased a lot over the years and they have reduced a good amount of risk.
  • Operating Income and margins: Margins are not yet at good levels, because of issues in some of their business units.
  • Cash: Cash levels have improved over the years, providing them good liquidity.
  • Liabilities: Liability profile is average, but not too concerning, as they have taken steps to deleverage over the past few years.

Overall, the company has a reasonable balance sheet, but there are areas that could still be improved.