© Reuters. FILE PHOTO: A technician stands near a section of an offshore wind turbine during a visit to General Electric's offshore wind turbine in Montoir-de-Bretagne
By Rajesh Kumar Singh
CHICAGO (Reuters) – General Electric (NYSE 🙂 Co's turnaround plans looked dead to many last spring when the lucrative engine business became another victim of the coronavirus pandemic as global air travel dried up.
The Boston-based industrial conglomerate's shares lost half their value in the early days of the pandemic. Declining sales put GE, already struggling with deleveraging and operational challenges, into survival mode – a quick shift in focus from investing into profitable growth opportunities.
GE shares have risen over 145% since last May, outperforming the broader market as more investors bet that the turnaround will pick up pace. They also expect that wind turbine and renewable energy businesses will get a big boost as nations and corporations make the transition to a low carbon economy.
"The long-term earnings potential for this company is dramatically higher," said Dan Babkes, partner at Pzena Investment Management, which has a significant stake in GE.
William Blair analysts expect GE's valuation to double in the next three to four years.
On Tuesday, GE's earnings report for the first quarter should provide evidence of such bullish bets. Despite forecasting a cash outflow, the company expects a "significant" improvement over last year when it burned $ 2.2 billion in cash.
The improvement would come at a time when the jet engine business, usually GE's cash cow, is still dependent on the collapse in global air travel.
Analysts surveyed by Refinitiv expect an average cash outflow of $ 1.3 billion.
Free cash flow is closely monitored by investors as a sign of the health of GE's business and ability to pay off debt.
Since its acquisition in 2018, CEO Larry Culp has sold assets to mend the balance sheet, including a $ 30 billion deal to merge the company's jet leasing unit with Ireland's AerCap. GE now expects to reduce total debt by $ 95 billion by 2023.
According to Culp, a "significantly" undisclosed balance sheet would allow GE to fund accelerated organic growth.
He has also focused on lean manufacturing practices aimed at reducing waste and generating profit margins.
Babkes said the focus on costs and restructuring has prepared GE's aviation business for a "dramatic" rebound in earnings as air travel recovers.
Similarly, the upcoming earnings reports should reflect the restructuring of GE's power and renewables units.
"Your financial statements today reflect the execution of historic deals," said Babkes. "Your financial statements tomorrow will reflect the cost base you have achieved with the restructuring."
GE will also benefit from the green energy transition. The company will supply wind turbines for one of the largest onshore wind farm projects in the USA. The demand for new offshore Haliade X turbines has increased.
GE plans to sell $ 3 billion worth of offshore turbines by 2024 from less than $ 500 million a year earlier, and predicts the offshore wind market will grow at an average rate of over 20% over the next 10 years .
William Blair analysts estimate that by the middle of this decade more than half of GE's revenue should come from converting gas turbine power to hydrogen and renewables and from grid upgrades.
"From our perspective, GE's prospects for sustainable outperformance of late have never been more obvious," a note read.