GE earnings: Aerospace recovery ‘finally coming through,’ analyst says

Bank of America analyst Andrew Obin joins Yahoo Finance Live to discuss General Electric earnings and the health of the conglomerate's businesses following its health care spin-off.

Video transcript

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General Electric reported an earnings beat this morning with robust demand for jet engines and power equipment. Still, the company gave a disappointing forecast for the year due to problems in its renewable energy business. B of A Securities senior multi industrials and industrial software analyst Andrew Obin joins us now to discuss.

Good to see you, Andrew. I know that renewables missed your expectations. We're seeing investors really honing in on that with the stock price here. What do you think went wrong here?

ANDREW OBIN: Yeah, so, look, our view is that the quarter was pretty solid. GE beat the consensus on EPS and, actually, free cash flow. I think the debate that's taking place is really about their free cash flow forecast.

You know, GE is one of the most complex companies out there. So the big debate, the role of progress payments in terms of their free cash flow forecast, our take is that on an apples to apples basis, it's fairly straightforward. We do think free cash flow is quite a bit better than the street is forecasting.

I would say the fly in the ointment is that operationally. The renewable business is probably not as robust as the Street has expected. But really, free cash flow has been the key focus for investors for this name.

They beat very nicely in the quarter. And the outlook for 2023 is also quite a bit above Street's expectations. But as I said, the debate is about progress payments. If you dig in, actually, on a net basis, what you have very strong aviation performance and solid performance in power, aided by the progress payments.

- So let's dig into the aerospace because I know you were also looking at military there for them. What do you like in this report?

ANDREW OBIN: Yeah, look. The big debate is that the pace of recovery in the aerospace, right, obviously, also the supply chain has been gummed up on the commercial aerospace side. So what we're finally seeing, we're finally seeing the signs of this commercial aerospace recovery.

We've been waiting for it for a couple of years right. Investors have been on and off, on and off. I think it's been a big disappointment for investment-- for investors over the past couple of years.

It's finally coming through. If you take a look at GE stock's performance is trading in line with other aerospace names. I think the big story is the recovery in transpacific travel that's probably coming throughout 2023.

It's actually the biggest pool of profits for GE Aviation. So we finally started to get nice visibility into '23. And we think that explains nice stock performance year to date.

- And in his commentary, Larry Culp, saying looking ahead, GE is positioned to drive growth, profit, and cash. And our outlook reflects our confidence in our businesses. What do you see as some of the weaker aspects of business?

I know we talked about what we're seeing with renewables. Is there anything else, in terms of headwinds, that you're keeping an eye on?

ANDREW OBIN: No, actually. I would say, look, the issue is, as I said, we are growing-- the aerospace industry, you know, got rid of a lot of people during COVID. And they're finding that it's really tough to ramp up.

But it's a broader industry-wide issue. So I think GE is no different from the rest of the industry, right. And, obviously, as GE starts delivering engines, engines are less profitable than services.

So the mix is going to turn, somewhat, negative. Look, as I said, renewables, the wind turbine business has been a big, big disappointment in 2022. There is a big restructuring program.

It missed our expectations in the fourth quarter, offset by nice performance in the core energy business. But we think that's the source of uncertainty. And the conversations we've been having with investors today, right, is just a view that GE really sees a straight line on restructuring from now through '24.

And I think there are some questions among the investors as to how much confidence we can have in that. But I want to say that GE is taking material amount of restructuring of this business, taking out fixed costs.

Higher rate is a huge, huge material health care. Right, it just changes. It's a game changer for the industry for the next decade. The question is how soon are we going to see the impact of these positive changes in '23?

- And as we talk about that spinoff into health care, what kinds of conversations are people having? What sort of time horizon are they looking at to really see that really taking off?

ANDREW OBIN: For renewable [AUDIO OUT] around?

- For the health care, yes.

ANDREW OBIN: Well, health care-- health care has been spun out. So health care is no longer part of the business. So I would say the other thing that happened today is that, if you look at the outlook, right, some analysts still have health care as part of GE.

And so what's interesting is that GE reported with health care. But, obviously, going forward, the free cash flow and earnings exclude health care. Right, it's now going to be followed by health care analyst.

So I think this is adding to confusion today. Because if you look at the consensus outlook, right, if you look at people's models, people still have health care numbers in their model.

Actually, health care relative to our expectations, was very good. It's just the issue is that some people still have health care as part of ongoing operations in '23. And it's a standalone separate company, albeit GE still owns a nice chunk of it, which they monetize over the next four months.

- And that's an important distinction because a lot of people sort of jumping into the stock and wondering-- and not really getting too clear on that. So thank you very much. B of A Securities senior multi industrials and industrial software analyst Andrew Obin. Thank you so much for joining me this morning.