General Electric Co. indicated it will tank this year, with cash flow and its struggling power business the main drags, but looks to starting turning around next year and start winning in 2021.
New York Knicks and New York Giants fans may be able to relate.
GE investors appeared to embrace the company’s approach, as the stock bounced sharply, and extended gains as Chief Executive Larry Culp began speaking on a conference call.
“2019 is a reset year…2020 and 2021 will be meaningfully better.”
The company GE, +2.79% said in an investor update that it expects 2019 adjusted earnings per share of 50 to 60 cents, down from 65 cents in 2018, and below the FactSet consensus of 70 cents.
Adjusted Industrial free cash flow (FCF) is projected to be negative $2 billion to flat this year, confirming Chief Executive Larry Culp’s call last week that it would be negative.
“GE’s challenges in 2019 are complex but clear,” Culp said. “We are facing them head on as we execute on our strategic priorities to improve our financial position and strengthen our businesses.”
The stock initially tumbled as much as 4.5% in premarket trade as the GE Outlook presentation became available, then bounced sharply as investors digested the details of the plan. The stock was up 1.3% just before the start of GE’s conference call, with gains accelerating to as much as 4.4% as Culp once again pleased investors with his words. The stock pared some gains after the opening bell.
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For investors who feel the “negative” FCF outlook for this year is a good thing for the stock, as it means the guidance is now “de-risked,” J.P. Morgan analyst Stephen Tusa cautioned in a recent note to clients that, “No, negative in 2019 is not ‘good.’”
Also read: GE stock sinks as negative cash flow outlook wipes out gains from biopharma deal.
For GE’s power business, the company guided 2019 FCF to be “down,” or more negative than the negative $2.7 billion in 2018, with 2020 expected to be “significantly better but negative.”
Within power, GE said its gas business is starting to see progress, but it’s still “early in a multi-year journey.” The company is targeting a reduction in base costs of 11% to $3.2 billion in 2019, followed by a further 13% reduction in 2020 to $2.8 billion.
Culp acknowledged that Power has been “under-managed” for the past couple of years, as management was “slow to embrace market realities” and therefore slow to address its cost structure.
The business is in “serious turnaround mode,” Culp said on the conference call. “This is not going to be quick.”
The following shows a summary of GE’s adjusted industrial FCF estimates for this year, next year and in 2021 for each of its businesses:
|GE business||2018 FCF (negative)||2019 FCF forecast (negative)||2020 FCF forecast||2021 FCF forecast|
|GE Industrial||$4.5 billion||($2 billion)-$0||Significant improvement, positive||Acceleration|
|Power||($2.7 billion)||Down||Significantly better but negative||Positive|
|Aviation||$4.2 billion||About flat||Flat to growing||Up/accelerating|
|Renewables||$500 million||Down and negative||Better but still negative||Positive|
|Healthcare||$3.0 billion||Down||Up (excluding BioPharma)||Up|
|BHGE dividend||$500 million||BHGE dividend (Expect to decline in line with ownership)||N/A||N/A|
|Transportation/Lighting||$100 million||M&A exits||M&A exits||M&A exits|
Separately, the company said it remains committed to a financial policy that targets a credit rating in the single-A range. That would be one notch above the current BBB+ rating at S&P Global Ratings.
GE’s stock has soared 52% over the past three months, but was still down 24% over the past 12 months. In comparison, the Dow Jones Industrial Average DJIA, -0.06% has gained 6.6% over the past three months and has advanced 3.8% the past year.