On Tuesday morning, among the masses of higher-profile large-cap corporations releasing first quarter financial results, stood General Electric (GE) . Certainly not your grandfather's General Electric, but this version, CEO Larry Culp's version.
For the three month period ended March 31st, General Electric posted an adjusted EPS of $0.27 (GAAP EPS: $5.56) on revenue of $14.486B. Both the adjusted EPS print and the revenue number easily exceeded Wall Street's expectations as revenues expanded 14.4% year over year. For the period, GE took in total orders of $17.6B, which amounted to growth of 25% or organic growth of 26%.
The adjustments made can be a little confusing. First off, the firm shows adjusted revenue of $13.695B (+15%) after factoring insurance-based revenues. Secondly, I am sure that most readers have probably noticed the blow-out GAAP EPS print. This oversized number comes as the result of $5.906B in gains made on the sale of equity securities. That's the spin-off of the healthcare business, now known as GE Healthcare Technologies (GEHC) , which was completed during the quarter reported.
After adjusted costs increased 11% to $13.047B, adjusted profit increased to $877M on an adjusted profit margin of 6.4%. That was up from 3.5% for the year ago comparison. Including the sale of GEHC, profit margin, GAAP style printed at a wonderful, but obviously unsustainable 44.8%.
The CEO
The firm reported a solid quarter. On that there is no doubt. Chairman and CEO Larry Culp led off the press release with a statement on the firm's quarter... "In the first quarter, we delivered double-digit top-line growth with all segments up organically and continued strength in services, as well as margin expansion in all segments. And we reported our first positive free cash flow in the first quarter in nearly a decade."
On the firm's various business units, Culp added... "At GE Aerospace, we are growing rapidly and supporting our customers amidst the pronounced commercial ramp. At GE Vernova, we are seeing continued signs of progress in Renewable Energy while Power is delivering solid growth."
Segment Performance
- Aerospace... generated revenue of $6.981B (+25%), producing segment profit/loss of $1.326B (+46%), on a profit margin of 19% (up 280 basis points). Organically, segment profit increased 43% on margin growth of 240 bps.
- Power... generated revenue of $3.82B (+9%), producing segment profit/loss of $75M (+19%), on a profit margin of 2% (up 20 basis points). Organically, segment profit increased 35% on margin growth of 50 bps.
- Renewable Energy... generated revenue of $2.837B (-1%), producing segment profit/loss of $-414M (+5%), on a profit margin of -14.6% (up 50 basis points). Organically, segment profit/loss improved 10% on margin growth of 210 bps.
Fundamentals
As mentioned by the CEO in the above quotations, GE posted positive free cash flow for Q1 2023 in nearly a decade (since 2015). However, one only taking a quick glance at the statement of cash flows on the firm's Form 10-Q might not readily see it. One has to read through the published material.
For the period reported, GE drove operating cash flow of $155M, less $6M worth of insurance-related flows, so... $149M. This is up from $-909M for Q1 2022. Out of that comes $299M worth of gross additions to property, plant and equipment as well as internal-use software. Then, one must add back on separation cash expenditures, corporate restructuring cash expenditures, and taxes related to business sales, all adding up to $252M.
Yes, this is highly adjusted, but it does bring free cash flow to $102M, and free cash flow is a non-GAAP metric for measuring earnings quality to begin with. Out of that, the firm repurchased $309M shares of common stock and paid out $203M in shareholder dividends. Safe to say, not going forward, because as you will see, guidance is optimal, but for the quarter reported, GE still remained a bit over-extended.
Turning to the balance sheet, at quarter's end, GE ran with a cash position (including securities investments) of $24.815B and inventories of $16.198B. This puts current assets at $60.286B. Current liabilities add up to $48.177B, including $2.262B in short-term debt. This put the firm's current ratio at 1.25, which is healthy. Less inventory values, the firm's quick ratio comes to 0.92. Not perfect, but not the end of the world, and understandable for an industrial type business.
Total assets amount to $164.472B. This includes $19.097B worth of goodwill and other intangibles. At 11.6% of total assets, I see no problem here. Total liabilities less equity comes to $131.649B, including long-term debt of $20.159B. Yes, this is GE and current assets outweigh current liabilities, total assets outweigh total liabilities without abusive use of valuation for intangibles, and the cash position outweighs debt-load.
Heck, this is not even your father's GE. Nice, job, Larry Culp... nice job. I used to dread going over GE's fundamentals prior to Culp's arrival. Not only because they were awful, but because under Culp's predecessor, the information was presented in such a complex and convoluted way that even after a multi-decade career of working with such data, I had a horrific time (back then) trying to figure out just how healthy or unhealthy the firm was.
Guidance
For the full year, based on first quarter results and market demand, "GE is raising the low end of its full-year adjusted EPS and free cash flow ranges." GE now looks for full year adjusted EPS of $1.70 to $2.00, up from prior guidance of $1.60 to $2.00, and full year free cash flow of $3.6B to $4.2B, up from the previous guidance of $3.4B to $4.2B. The firm kept guidance for revenue growth where it was, in the high-single digit (percentage) range.
My Thoughts
As I have said, this was a very solid quarter. The balance sheet is squared away. The free cash flow did require a couple of walks around the park to figure out, but we got there. The firm spent far more than what it produced in free cash flow on returns to shareholders, which I can not be okay with. That said, the guidance is excellent, and if accurate, this imbalance will more than correct itself in a good way.
Perhaps my only problem with the stock is that it is expensive, trading at 50 times forward looking earnings. I understand that the valuation is likely in the aerospace business, and that GE Vernova is, or should be a drag on said valuation. I am just unsure on how to value these businesses for an economy setting up for a struggle this year or next. The rest of the aerospace industry trades either slightly above or slightly below 20 times. Even the ones not overtly reliant upon defense contracting.
The stock had more than rocketed into a breakout from a double bottom reversal pattern with a $63 pivot late last year. My target price based on that pivot would have probably been about $76. The stock now trades with a $101 handle, up 60% from pivot and up 106% from the late September low.
The company is making all the right moves, so I cast no blame. Even with the expected spin-off of the Power and Renewables business expected in a tax free deal next year, I see the valuation as excessive and the recent surge as overdone. Therefore, I will not be jumping on the early morning bandwagon this morning.
However, for those interested in being in this stock ahead of the Vernova spin-off, I would not be surprised to see a test of the stock's 50 day SMA (simple moving average) develop as the economy sputters. Just an opinion, but I would rather go out two months and write (sell) $90 June 16th puts for $1.25 to $1.50 (or more) than pay up for the equity today.
