Power Business Continues to Vex GE

Joshua Aguilar: Narrow-moat GE reported second-quarter earnings today that revealed little surprises, in our view. We're not making any changes to our fair value estimate. We're primarily concerned with anticipated weakness at power, which continues to vex the firm. First-half trends continue to indicate a gas power market of less than 30 gigawatts in 2018. Segment profits of $694 million for the first half of the year are at a run rate in line with our 2018 projections. Our primary concern from a long-term perspective is the attractiveness of renewables from a levelized cost of energy. There are no quick fixes here; after healthcare and oil and gas separates, power will continue to be a greater portion of the firm and these problems aren't going to go away anytime soon.

As for aviation, the firm's crown jewel, revenues rose to $7.5 billion, a 13% year-on-year increase from last year. LEAP engine deliveries are now only about four-plus weeks behind schedule compared to seven weeks previously in the early part of the year. CFM representatives are confident that the joint venture with GE and Safran will meet its target to deliver 1,100 LEAP engines by the end of the year. New engines are sold at a loss, so we would anticipate decreased profitability in aviation at the back half of the year.

Finally, healthcare was also a strong performer in the quarter, rising 6% year over year to nearly $5 billion, helped in good part by a strong showing in life sciences. The firm's separation of healthcare does help GE placate credit agencies as it moves toward a net debt to EBITDA of 2.5x, but it also represents the disposal of a moaty asset that's less cyclical compared to other segments.