GE Meets With Investors Tomorrow. Here’s What To Expect


Al Root

Mar 13, 2019

General Electric meets with analysts on Thursday, and that means more information for investors about the company’s turnaround and—very likely—more volatility for GE’s stock too.

It’s been a wild ride for General Electric (ticker: GE) shares this past year. Its 52-week high is nearly $15 per share, while its low is about $6.40 per share. The stock is up 33% year to date after dropping 57% in 2018, and it trades for 14.6 times estimated 2019 earnings of 67 cents per share. Wall Street’s earnings estimates, however, range from 27 to 92 cent per share, so take no comfort in the denominator.

At the “outlook” event analysts and investors will hear about many of the company’s divisions, and with all that’s transpired recently it can be difficult for investors know where to focus. With GE on better financial footing after recent asset sales, cash flow and cost reduction should be what drives the stock in coming months.

The Back Story: Since taking the reins, CEO Larry Culp has been clear about his two top priorities for the company: reduce debt and fix GE’s power division.

Debt levels have fallen. GE ended 2018 with $47.6 billion in net debt, down nearly $15 billion from 2017. What more, GE’s biopharma sale to Danaher(DHR) will bring in an additional $20 billion.

The company’s ailing power unit hasn’t turned the corner yet, however. Last year revenues at the division fell $7.6 billion, or 21%, and operating income swung from a $2 billion gain in 2017 to an $800 million loss last year. Power producers are relying less on large gas and steam turbines—the ones GE makes—for new electricity generation capacity.

What’s New: With debt and liquidity issues put to bed—at least for the next few months—investors can now focus on the industrial businesses.

Culp surprised investors last week at the JP Morgan Aviation, Transportation & Industrials conference when he said industrial free cash flow would be negative in 2019. That’s stopped the GE stock rally in its tracks and shares fell 6.7% for the week.

William Blair analyst Nicholas Heymann wasn’t alarmed by Culp’s cash flow revelation. “Industrial free cash flow will only be negative because it will include an estimated $5 to $7 billion of one-time cash costs,” he says. GE is changing the way it does business, in part, by eliminating GE’s practice of selling industrial receivables to GE Capital.

“I want free cash flow broken down by division on Thursday,” says Gordon Haskett analyst John Inch. “I want to know [GE] Aviation’s cash flow.” Inch believes GE aviation’s business is the main support for GE’s stock price. “Some people think aviation is worth $100 billion, it will be important to understand the cash flow that underpins that view,” Inch adds.

Inch is considered a GE-bear because he rates the stock “underperform” with a $7 price target. Heymann is bullish on GE stock and rates it “outperform.” Heymann doesn’t have a published target price, but writes that GE’s intrinsic value is between $14 to $16 per share.

While things remain healthy in aviation, investors will want to know now bad things are in power. Heymann sees GE spending $6 to $9 billion to return that business to sustainable profitability. Culp has said $1 billion in costs have already come out and more detail about additional restructuring should be forthcoming.

Looking Ahead: Ultimately, investors need to figure out what the remaining pieces at GE can earn once restructuring is completed.

Inch thinks 2020 cash flow for GE amounts to 35 cents per share, which is how he derives his $7 target price. Wolfe Research analyst Nigel Coe believes 2020 cash flow will be closer to $1 per share. Coe rates GE shares outperform with a $15 price target.

That wide range sums up the situation at GE—there is no shortage of opinion on GE’s cash flow or GE’s stock. No matter what GE management says on Thursday, analysts and investors won’t get a definitive answer on any issue—just another piece of the puzzle.