GE’s Outlook Is Sunnier Than Ever

After attending GE’s GE 2023 outlook, we raise our fair value estimate to $108 per share from $99 previously. Our DCF-derived fair value estimate also sits in line with our multiple-derived sum of the parts value. The primary levers for our more bullish forecast include 1) a longer tailwind from the commercial aerospace recovery than we were previously modeling, 2) power reaching double-digit operating margins three years sooner than we thought previously, 3) changing our mind that renewables will reach breakeven in 2024 (two years earlier than we thought previously), and finally, 4) slightly higher stage II growth given the longer aerospace tailwind. Offsets to our positive take include a) greater margin mix headwinds from the LEAP ramp (predominantly), and b) some additional standalone corporate costs than we previously earmarked. These two variables reduced our midcycle operating margin by 20 basis points at the consolidated level.

We continue to believe that our advantage in how we view this stock stems from our long-term horizon rather than any short-term informational edge. In fact, the discrepancy between our assessed value and the market price is our willingness to look past the next eight quarters where a lot of GE’s net present value continues to lie, particularly since 2024 will reflect an inflection point in Vernova’s margins. Yet, in the near term, we largely agree with the market’s assessment for 2023 adjusted EPS and free cash flow. After GE’s outlook, we note that GE has fully shifted to offense with many growth opportunities that still lie ahead. Said differently, we think the bear case is looking backward and miscalculating liabilities, which GE is managing well, in our view. Aside from the $1.8 billion GE still owes to shore up its insurance capital requirements with the Kansas Insurance Department (well known to the market), we see no additional meaningful calls on shareholder capital.