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Will GE Be A Comeback Story Of The Decade?

comebackge june20 lt

GE's eviction from the Dow Jones Industrial Average adds insult to the injury. A slap in the face to a beleaguered company that has been battered by earnings disappointments, capital-allocation fiascos, cash crunch and the last nail on the coffin - a steadily declining stock price that ended the company's 111-year run on the blue-chip index. The stock is down more than 50% from its 52-week high of $28.19.

Down the line, GE has transformed from a too-big-to-fail conglomerate to a too-big-for-success albatross. Although the power, oil & gas markets did make things worse last year, GE has admitted to being too-much focused on EPS and operating profit, and not paying enough attention to cash.

However, history is a great teacher and GE is certainly learning lessons from its past and refocusing strategies to stage a comeback to its Camelot days.

Key catalysts

* Narrowing long-term focus to three key industries - Aviation, Health, and Energy that are positioned for major long-term growth.

*Making significant progress on planned $20 billion+ of non-core asset dispositions. GE sees proceeds of $5 billion to $10 billion from asset exits during 2018.

*CEO John Flannery is open to revisiting the company's structure, which in other words is "break up" GE into parts, a departure from an empire-building tradition.

*plans to rigorously align capital allocation strategy with customer needs and market realities to deliver customer outcomes.

*Higher oil prices bode well for GE's 62.5% stake in Baker Hughes.

* Empowering customer productivity through digital applications. Using GE's Flight Efficiency Analytics Suite, Australian airline Qantas is on track for annual fuel savings of more than 30 million kilograms, equating to 1% of savings.

*Harnessing the power of Additive manufacturing (group of technologies that includes 3D printing) to create advanced designs, while cutting costs through the elimination of traditional manufacturing constraints.

GE Aviation used Additive manufacturing to develop a new turboprop engine in just 2 years. More than a third of the engine is 3D-printed from advanced alloys and the engine passed its inaugural test at the end of 2017. The use of Additive manufacturing helped combine 855 separate components into just 12, shaving more than 5% in weight, improving fuel burn by 20% and providing 10% more power than competitor offerings in the same size class, while simplifying maintenance. This year, every GE business is expected to have a specific additive manufacturing adoption strategy and goals.

*streamlining Global Research Centers from nine to just two - to act as technology accelerators, feeding new research into game-changing technologies including, energy storage, cell therapy, digital medical imaging, to name a few.

* Plans to reset, refocus and renew the challenged GE Power business in the grips of a protracted downturn. The segment posted 45% decline in 2017 earnings, and prepares for a lackluster market that could be as low as 30 gigawatts in 2018, deteriorating further into 2019.

In 2017, GE consolidated the legacy Power and Energy Connections businesses, and plans to reduce global headcount by about 12,000 positions in the combined business, cut manufacturing capacity by 30% or more and shave $1 billion in structural costs this year.

As part of its strategy to improve cash conversion for GE Power, the company is now working to double its current inventory-turn performance to 8, by 2020, starting with $1 billion inventory reduction in 2018. Inventory turnover measures how fast a company sells inventory. A low turnover implies weak sales and excess inventory, while a high ratio implies either strong sales or large discounts.

With a 1600-gigawatt installed base of assets in the world, the company says it has identified $1 billion in new service opportunities to maximize its service dollars per installed asset.

GE Power targets 10%-plus profit margins for the long-term vs. the 5.6% reported in 2017.

*Initiatives to restore GE Capital's capital adequacy by 2019-end - In 2017, GE incurred a massive $0.91 per share of charges related to run-off insurance operations and related actions to make GE Capital smaller and more focused. The company said its actions would be sufficient to restore GE Capital's capital adequacy to appropriate levels by the end of 2019.

* Better-than-expected structural cost savings - After promising a structural cost-out target of $1 billion for 2017, which was later raised to $1.5 billion in Q3 of last year, the company delivered a better-than-expected $1.7 billion in actual savings for last year. GE plans to cut an additional $2 billion in structural costs this year, and has already reported $354 million in structural cost-out for Q1.

*With operations in more than 180 countries, GE's global footprint may be a singular asset in an increasingly protectionist world.

*Stronger global economic growth bodes well for the company, which is redoubling focus on China, India, and emerging markets like Southeast Asia, the Middle East and Africa for future growth.

* The proposed merger with Wabtec positions GE Transportation for a rebound with estimated adjusted EBITDA growing from about $750 million in 2018 to between $900 million and $1 billion in 2019. The combined company is expected to have substantial annual run-rate synergies of $250 million.

*Well-positioned to profit from Industrial Internet Of Things (IIOT) initiatives - While industrial data is growing at twice a pace vs. other sectors, only 3% of this data is tagged and used meaningfully. GE has built Predix, the Industrial Internet platform to put businesses in charge of their IIoT journey. On this comprehensive platform, businesses can create, deploy and operate industrial apps to turn operational data into actionable insights.

Investment in the Industrial Internet of Things (IIoT) is estimated to top $60 trillion during the next 15 years, and by 2020, over 50 billion assets are expected to connect to the Internet. GE seems well-positioned to build upon this opportunity with its Predix platform. GE expects Predix product revenues to double to around $1 billion in 2018.


Summing up, the road to recovery may be bumpy, but we believe GE is certainly making inroads. The stock may be worth watching at this price point, as it seems positioned for at least 15% upside from current levels within the next 12 months. By year 2020, the company may be back on its feet.

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