In 2018, General Electric s (NYSE: GE) adjusted free cash flow with over $ 1 billion the year before to $ 4.5 billion. It fell well off management's first guidance for between $ 6 billion and $ 7 billion of free cash flow. Furthermore, CEO Larry Culp on GE's earnings call at the end of January claimed that free cash flows will worsen further this year.
Earlier this month, Culp shook investors at an investor conference saying that the free cash flow would probably be negative in 2019. On Thursday, GE provided more detailed information on its outlook for 2019 and beyond. Fortunately, the company's 2019 cash flow forecast is not as bad as anyone had feared, and GE expects strong improvement over the next two years.
Setting expectations for 201
General Electric expects to produce negative free cash flow of up to $ 2 billion this year, despite the fact that revenue growth and modest margin expansion have been adjusted.
There are some reasons for this great disagreement. By far the largest contributor to GE's forecast cash flow decline is the increase in cash restructuring costs, as the company is working to cut its overhead and power business in particular.
GE also expects cash flow in the power industry – which burned $ 2.7 billion in cash last year – to fall deeper into negative territory by 2019. Apart from restructuring costs, the major cash flow is headwinds here cost overruns on projects approved with overly aggressive assumptions and inheritance costs that are mainly related to acquiring Alstom's power business.
A third major cause of GE's forecast cash flow decline in 2019 is that the renewability segment is expected to fluctuate from producing around $ 500 million of free cash flow last year to burning cash in 2019. Variable capital changes are driving most of this year.
Management expects great improvement in 2020 and 2021
In connection with the presentation of the 2019 outlook, GE's management stated that free cash flow would recover well into positive territory next year, with further improvements coming in 2021. Of course worries some skeptics that these projections are too optimistic. Let's look at why GE managers are confident of a strong, free cash flow recovery.
First, cash sales costs will begin to fall in 2020 and will fall significantly back in 2021. Second, GE will look at huge cost savings from these efforts by 2021. Management estimates that overheads will be at least $ 500 million down compared to 2019. Overhead costs in the power unit can fall even more, while GE Power will also benefit from rationalization of production and service prints. Third, GE will work through most of its "non-operative" headwinds – such as legal settlements and unprofitable inheritance projects – over the next two years.
In fact, GE believes its power and renewable segments will provide both positive free cash flow in 2021. By comparison, they are about to burn $ 4 billion or more on a combination this year.
Asset sales will negatively impact the cash flow over the next two years, but lower interest rates and organic growth in GE's health and aviation segments should more than compensate for this.
GE did not quantify exactly where free cash flow will end in 2021. However, it is likely to surpass the $ 4.5 billion dollar – with the mass growth potential of the future that GE Power recovers further, and GE Aviation continues its dry growth .
GE stock has tons up
Investors shouted GE's outlook and sent GE shares up nearly 3% to $ 10.30 on Thursday. Still, it is below the high stock hit a few weeks ago, after GE announced a $ 21 billion deal to sell its biopharma business to Danaher which will allow the company to quickly reduce its debt . And it's nearly 70% below the perennial high GE stock reached less than three years ago.
If GE can beat its 2021 goals and deliver further improvements thereafter, free cash flow can reach $ 1 per share by 2022 or 2023. This will potentially justify the GE share price as high as $ 20.
This will still not delete all investors' losses over the past two years. However, these are reduced costs. After a ten-year beef market, there are not so many stocks with a good chance of doubling the next three to four years. The GE warehouse could thereby deliver market return returns for investors in the future.