Despite better than expected first quarter earnings and a minor stock price pop, GE still has a lot to prove to investors — and then some.
Chief among that long list is stabilizing the struggling power business, which represents about 22% of annual sales. If turnaround specialist now GE CEO Larry Culp can’t fix power’s operating processes, culture and cost structure, then the industrial giant’s cash flow generation will likely remain pressured.
The first quarter suggested that Mr. Fix It will need more time to work his magic on power. Power’s order and revenues fell 14% and 22%, respectively, in the first quarter year-over year. The segment’s profits dropped to $80 million from $272 million a year ago.
GE said in a footnote on its earnings that sales in power only declined 4% “organically”, or excluding items. But digging into the company’s 10-Q filling reaffirms the business is still dealing with the multitude of issues that plagued its performance in 2018.
“As previously disclosed, the Power market as well as its operating environment continues to be challenging. Our outlook for Power is driven by the significant overcapacity in the industry, our market penetration and uncertainty in timing of deal closures due to financing and the complexities of working in emerging markets,” GE wrote in the filing. “In addition, our near-term earnings outlook could be impacted by project execution and our own underlying operational challenges. Finally, market factors such as increasing energy efficiency and renewable energy penetration continue to impact our view of long-term demand.”
Not exactly the encouraging words that should make someone back up the truck on GE’s stock.
The byproduct of power’s struggles
With problems in power, come problems with cash flow.
GE said Tuesday that its industrial free cash flow — a number closely watched by Wall Street to assess the health of the industrial giant — was an outflow of $1.79 billion in the first quarter. A year ago, GE’s industrial free cash flow was an outflow of $1.77 billion.
On an adjusted basis, GE said its industrial free cash flow was an outflow of $1.2 billion.
Many on Wall Street were looking for a free cash flow outflow of about $2 billion in the quarter.
At a March meeting with investors, GE CEO Larry Culp promised that industrial free cash flow would be down $2 billion to flat this year. He then expects it to be in “positive territory” in 2020 and then accelerate in 2021.
GE Chief Financial Officer Jamie Miller reiterated the company’s 2019 cash flow outlook on a conference call with analysts.
The tepid first quarter cash showing — despite it being better than analysts forecast — has GE in a hole relative to Culp’s guidance. GE ended the first quarter with $73.2 billion in cash and equivalents, up from $68.7 billion a year ago.
For GE, the continued pressured free cash flow is a byproduct of ongoing struggles in most areas of its business — notably the aforementioned power business. GE saw operating profit margins decline in two of its six business segments in the first quarter (aviation and power). The renewable energy business swung to a loss of $162 million versus a profit of $77 million a year ago.
Health care remains the standout business for GE — the segment notched 110 basis points of operating margin improvement on the back of sales gains in equipment and services.
Investors chose to ignore the overall lackluster free cash flow early on and instead focus on GE’s profit and cash flow beats. GE’s adjusted first quarter earnings came in at 13 cents a share versus Wall Street estimates for 9 cents a share.
Shares popped 5.7% in pre-market trading, but have since given up a decent chunk of those gains as investors dig into the meat of GE’s latest financial filing.
Source: in.news.yahoo
