Q2 Another Feather in GE Bulls’ Caps; FVE Raised

Nothing in narrow moat rated General Electric’s GE results materially alters our long-term thesis. In fact, GE outperformed our expectations in power and renewables, performed mostly in line with our expectations for healthcare, but slightly lagged behind our expectations in aviation. We slightly bump up our fair value estimate to $15.90 from $15.70 in what we see as a solid quarter confirming our bullish view. As a reminder, we see multiple potential remaining catalysts including the AerCap-GECAS merger, which has received regulatory and AerCap shareholder approval; a potential monetization of healthcare; a potential ringfencing of insurance; a potential raised earnings guide as the year progresses; and of course, material progress toward a high-single-digit free cash flow yield, which could come in ever higher over the long term and quicker than the market appreciates.

While management’s raised free cash flow guide and GE’s broad-based performance provide us with greater confidence to bump up our 2021 free cash flow projection to $4.8 billion from $4.6 billion previously, there were puts and takes in our model, even as we bumped up our full-year adjusted EPS projection to 29 cents per share (and above guidance) from 26 cents previously. On the positive side of the ledger, we’re now persuaded by management that GE is well on its way for its gas power business to hit a high-single-digit operating profit margin, levels not seen in years and something we believe the market failed to appreciate during the trading day.

Total power (which aside from gas, also includes steam, nuclear, and power conversion) managed to hit a 7.0% segment profit margin during the second quarter, demonstrating that GE’s lean transformation and cost-out actions are taking hold, even in GE’s most troubled areas historically. It’s also a testament to power CEO Scott Strazik’s operating acumen.

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