Investors seem be feeling optimistic about
stock, even after the company said on Thursday it would earn less money this year.
The company, which also held an analyst day Thursday, said expects to earn about 55 cents per share in 2019, lower than Wall Street had predicted. But the stock was recently up 3.1% anyway, while the
Dow Jones Industrial Average
Why the optimism? General Electric (ticker: GE) has worked over the past few months to put its liquidity issues to bed by selling assets and shrinking its lending operation. On Thursday, the company provided new details about cash flow and the ailing power division. Some of the extra details are the big reason investors are bidding up the stock again.
The back story. Since taking over a CEO, Larry Culp has often reiterated his top priorities for the company: cut debt and turn around GE Power.
What’s new. Now investor attention turns to the power franchise. That division lost $800 million last year after sales fell 21%. Power revenues are still falling. GE said sales in 2019 would be down “high single digit percentage points.” But management added the business can grow again in 2020.
To manage the sales declines, GE plans to take out $800 million in costs. Culp said GE was “slow to embrace market realities” in power. The gas turbine market has been cut in half since 2015. But Culp added he is ready to size the business for that new reality.
GE also provided a detailed breakdown of its cash flow. Working capital—which is the cash involved paying suppliers and charging customers—requires more cash this year, creating one headwind. But that shouldn’t recur.
Cash restructuring costs will also remain high, and GE still has to make
pension contributions through 2022. Alstom is the 2015 power acquisition that generated a $22 billion write-off. GE says most of its cash-flow problems are one-time in nature.
Importantly, cash flow in the aviation business is expected to remain strong—at more than $4 billion this year. That is comforting for investors.
Cash flow is a controversial issue with Wall Street analysts, with estimates for free cash flow in 2020 ranging from 35 cent to $1 per share. “Cash in long-cycle businesses can be volatile,” CFO Jamie Miller told Barron’s. “When these businesses are growing or shrinking you have counterintuitive cash dynamics.” That means cash and earnings don’t always match up, but GE is confident cash flow will improve in the future.
Looking ahead. Culp said 2019 is about actions and not words. That is true. GE, for instance, guided to positive operating margins in the power division for 2019, which would be at least 3 percentage points better than last year. If they fail to do that—or to hit earnings guidance in Culp’s first full year as CEO—investors will punish the stock.
Write to Al Root at email@example.com