GE’s 2019 Earnings Outlook Misses Expectation, Problems in Power Business to Continue

GE expects 2019 adjusted EPS to touch somewhere between 50 and 60 cents. Wall Street had projected 70 cents.

U.S. multinational conglomerate, General Electric (GE) saw its shares tumbling after it disappointed shareholders with its lower-than-expected 2019 earnings outlook. The troubled conglomerate is battling with issues in its power business. While Wall Street expected adjusted EPS of 70 cents for 2019, the conglomerate projected between 50 cents and 60 cents. This was the first time that Larry Culp, GE Chairman and CEO, shared an outlook for the conglomerate after he took office in October 2018. In the conglomerate’s history of 126 years, Culp is the first outsider to run GE.

“We have work to do this year. However, we expect our performance in 2020 and 2021 to be significantly better,” stated Culp. GE shares were initially lower in premarket trading after announcing a disappointing 2019 outlook. However, they rose 1.3% from the previous day’s close of $10.02 a share.

As part of its 2019 outlook, GE announced that organic revenues of GE Industrial will be in the range of low to mid-single-digit. Adjusted margin for GE Industrial will stretch in the flat to 100 BPS range. The key metric of industrial free cash flow is expected to stay somewhere between flat and negative $2 Bn.

GE anticipates industrial free cash flow to return to positive next year

Culp is working on turning the situation around for GE as the conglomerate is expected to continue to face troubles in its power business. In a recent letter to shareholders, Culp laid out his vision for the conglomerate’s turnaround. The letter was part of the conglomerate’s annual report. Under Culp, the conglomerate looks to rebuild and focus around four businesses, viz. healthcare, aviation, renewable energy, and power. The conglomerate will aim to eventually restore the once-treasured dividend as it cuts costs and improves its cash generation.

GE shares dropped at another instance when Culp said last week that the conglomerate’s industrial free cash flow will be in the negative this year. Culp’s comment at a J.P. Morgan aviation, transportation, and industrials conference in New York City resulted in a drop of around 4.7% in GE shares. One of the key measures that GE investors watch is industrial free cash flow. Last year, industrial free cash flow was $4.5 Bn. However, the conglomerate projects a bounce back to positive in industrial free cash flow by 2020.

Culp is also focusing on GE’s debt overhang. The conglomerate is looking to target a debt-to-equity ratio under 4 times for severely leveraged GE Capital. “GE stays committed to … targeting a rating in the range of Single A,” said a spokesperson for the conglomerate.

Recently, an analyst of a popular investment banking firm said that GE’s valued aviation financing and leasing business has weakening earnings masked by gains and is in liquidation mode already. GE Capital Aviation Services (GECAS) is GE Capital portfolio’s crown jewel, as widely considered, said another analyst. However, it appears that GECAS assets could be overstated upon closer examination, the analyst added.