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What Will It Take for Belief in GE's Comeback?

Narrow-moat General Electric surpassed our expectations year to date on its top line, earnings per share, and industrial free cash flow.

Despite severe aerospace coronavirus-related headwinds, narrow-moat General Electric, or GE, surpassed our expectations year to date on its top line, earnings per share, and industrial free cash flow. Therefore, we raise our fair value estimate by over 8% to $10.40 from $9.60 previously. Our new fair value estimate puts us the very top of CapIQ consensus estimates in fundamentals and near the top of price targets (which is affected downward by the normalized weighted average cost of capital in our model).

While there were various puts and takes in our model, the primary driver in our increased optimism was healthcare’s outperformance--it knocked the cover off the ball. Segment operating margins improved sequentially by 270 basis points and 260 basis points year over year on an organic basis (when stripping out the effect of the sale of biopharma to Danaher). This is a business we originally expected to grow about 50 basis points after the sale to about 15.2% for full-year 2020. We’re now expecting healthcare segment operating margins in 2020 of about 16.8%, though we note one quarter bakes in the biopharma as the sale occurred during the first quarter of 2020.

Our confidence stems further from GE CEO Larry Culp’s public commentary that he believes the healthcare team can expand 75 basis points year over year, while performing at low-single-digits plus at the top line (at the midpoint). While these figures are nothing new per se as they were shared during the December GE Healthcare Investor Day, the team has outperformed expectations. What was interesting was Culp’s willingness to quote the top end of the range for margin expansion. In our experience, Culp is not prone to wild prognostications, and we’re confident in his leadership.

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About the Author

Joshua Aguilar

Director of Equity Research, Resources
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Joshua Aguilar is the director of resources equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Aguilar joined Morningstar in 2016 as an associate on the financials team, and he was promoted to analyst on the industrials team in 2018 and to senior analyst in 2022. He has served as associates coordinator since 2021 and led Morningstar's diversity efforts as DEI co-chair since 2020. Aguilar has been a mentor to several associates on their paths to becoming analysts. He also has hosted a Morningstar earnings town hall, participated in analyzing Morningstar stock, and been a strong contributor through both client interactions and his General Electric stock call. Aguilar co-authored an Outstanding Research Achievement-winning piece with colleague Kris Inton on CEO compensation in 2021. He also has taught Morningstar's model to new hires for many years as part of the valuation committee.

Before joining Morningstar, Aguilar was a practicing business transactional attorney in Florida. He graduated magna cum laude with a bachelor's degree in political science and criminology from the University of Florida. He also has a Master of Business Administration from Rollins College and a Juris Doctor from Wake Forest University.

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