https://www.wsj.com/articles/ge-will-be-dead-money-for-a-while-1532101453
The Wall Street Journal
U.S. Edition
July 20, 2018
GE Will Be Dead Money for a While
Quarterly results left Wall Street disappointed and signs of progress in the power division are likely far away
General Electric’s power business saw another big drop in revenue, profit and orders in the latest quarter.
The words “great quarter guys” have never been directed to the current holders of General Electric ’s GE -4.44% top jobs.
John Flannery and Jamie Miller, chief executive and financial officers since last year, respectively, would gladly have settled for a “whew, that wasn’t so bad” from Wall Street. But they didn’t get even that after unveiling second-quarter results Friday morning. While edging out analysts’ consensus estimates on both the top and bottom lines, much of what was in the middle didn’t look great. The stock went from mild premarket gains to a drop of over 3% as the company’s conference call wrapped up.
The main issue remains the ailing power-generation business, which saw another big drop in revenue, profit and orders compared with a year earlier. Earnings in the business, which mainly sells gas turbines, fell by 58% in the quarter compared with a year earlier. Cash flow suffered as well, specifically due to poor “progress collections”—cash received from customers during the performance of contracts. That can be seen as a hangover from the period when power profits looked suspiciously strong compared with cash flow. Mr. Flannery said second-half orders would be better and “about flat with last year.”
Electric Shock
General Electric operating profit, power and renewables divisions
Source: FactSet; forecasts for 2018-2021
Renewables
Power
2015
’16
’17
’18
’19
’20
’21
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
$6000
But that was a lackluster period too, and investors were rattled by the assessment. The upshot of the continued weakness is that free cash flow for the full year should now be around $6 billion, which is at the lower end of the most recent range of guidance. Management did reaffirm full-year adjusted earnings guidance of $1.00 to $1.07 a share. Analysts are more cautious with an adjusted EPS consensus of just 93 cents, according to FactSet.
To their credit, Mr. Flannery and Ms. Miller haven’t sugarcoated GE’s challenges during their brief tenures—a stark contrast to over three decades of careful corporate stage-management for Wall Street. Instead, their quarterly reports stress phrases like “cost-out” and “execution” ad nauseam.
An investor in GE had better brace for more of the same. A mere 24 days after the company’s last investor update, with short-term disposals under-way and longer-term ones like health care and energy many quarters in the future, it was unrealistic to expect glimmers of hope. Any turnaround in power may be two years away, and even that assumes global economic growth doesn’t stumble. If it does then the value of the oil-and-gas and health-care businesses will suffer and the currently thriving part of the future conglomerate, aviation, could take a hit. The next “great quarter” moment is far away.
“GE is on a multiyear transformational journey” said Mr. Flannery. That sounds like as much of a warning as a rallying cry.
Write to Spencer Jakab at spencer.jakab@wsj.com