Summary
- GE reports earnings Wednesday. The free-fall in commercial air travel could hurt Aviation's revenue and margins.
- NewCo's segment profit margin was 4% in Q1, down 600 basis points Y/Y. Segment profit margin could turn negative at some point.
- Debt/EBITDA exceeds 6x and working capital is negative. A ratings downgrade could be on the horizon.
- COVID-19 may have sunk GE's moat. Sell the stock.
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Source: Barron's
General Electric (GE) reports Q2 earnings Wednesday. Analysts expect revenue of $16.96 billion and EPS of -$0.1. Q2 will exclude results from Biopharma, which was recently sold to Danaher (DHR). GE's core operations, which consist of Aviation, Power Systems and Renewable Energy (NewCo), have been exhibiting stagnant growth for a while. The pandemic will likely exacerbate the decline.
In Q1, NewCo's revenue fell 7%. Revenue from Power and Aviation fell by double digits, while revenue from Renewable Energy spiked.
Power has been a poor performer for several quarters. It still represents 29% of NewCo's total revenue, so its performance could have an out-sized impact for the foreseeable future. COVID-19 hurt the segment's supply chains and hurt its ability to close certain transactions. If governments around the globe are hurting financially then it could reduce their appetite to fund future power generation projects.
Renewable Energy benefited from the Production Tax Credit, which aided onshore wind projects. Management projects solid deliveries for the onshore segment for the rest of 2020. Aviation experienced a 13% decline in revenue. Aviation was expected to be GE's moat. Its decline has made GE's outlook extremely cloudy. This is odd for a company known for having a strong portfolio of businesses. In divesting assets to pare debt, GE's operations have become less-diversified.
