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GE: What's Behind Our Moat Downgrade and Fair Value Cut

GE: What's Behind Our Moat Downgrade and Fair Value Cut

General Electric was once heralded as "America's most admired company." While we agree there is a lot to admire about the company, we no longer believe it merits a wide economic moat and are downgrading its moat rating to narrow. We are also lowering our fair value estimate to $15.70 from $19.

Our moat downgrade stems largely from the drag of GE Capital and recent significant revenue and margin reduction in the large revenue power segment; however, we still believe GE's aviation and healthcare segments boast wide moats. And while the firm this week announced plans to separate healthcare, existing shareholders will still own 80% of this attractive asset after the corporate action. Nevertheless, subpar returns from GE Capital will mask the earning power of the firm's moatier assets in the short term.

Meanwhile, our fair value estimate reduction ties to the negative contribution from GE Capital as the portfolio de-risks; slightly reduced revenue and margin assumptions; as well as a higher weighted average cost of capital stemming from a higher cost of equity due to greater than anticipated revenue cyclicality.

On the bright side, we consider many actions taken by new CEO John Flannery to be bold steps in the right direction. Flannery has embarked on a turnaround of GE, wisely choosing to restore accountability and focus on three core businesses: aviation, power, and renewable energy.

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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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