GE on Solid Footing; We Raise FVE

Despite the headline stock trade-off, narrow-moat-rated General Electric GE had a solid first quarter. We increase our fair value estimate to $15.10 from $14.10 previously, primarily due to interest rate tailwinds in GE’s pension liability, as well as time value of money. However, we also raised our fair value due to greater than expected progress in both healthcare and aviation’s margin profile (with the latter already hitting its 2021 target) in the first quarter, which itself was offset by weaker than expected top line revenue from aviation. With this latest raise, GE now is the cheapest name among our larger U.S. multi-industrials.

What disappointed us, however, was not commercial aerospace sales figures, where we still expect a second-half recovery, but rather military and systems sales. GE has maintained for quite some time that military orders have been there and that it just hasn’t delivered, so it’s certainly a watch item. In fairness, management did address the supply chain and rotorcraft delivery pressures on the call.

Considering GE's turnaround, we think a strong case could be made to increase our long-term earnings before interest growth assumption to be in line with peers (which would add about $1 to our fair value estimate). However, given what we perceive as mixed messaging on the timing of hitting the high-single-digit free cash flow margin (either in 2023 or just beyond), the headwinds related to GE ending its factoring program and unclear specific dynamics (we’re not alone here), as well as another major portfolio move that bears execution risk in the GECAS deal (as with any portfolio move), we prefer to see how the year develops before making such an adjustment.

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