General Electric s (NYSE: GE) the last four quarters were reasonably good, but the lack of guidance would not satisfy all their investors. In particular, the lack of color regarding the power segment gives uncertainty about its future direction. GE Power must recover to overcome earnings and cash flow concerns if global growth is to fall and affect GE Aviation's future earnings. Let's take a look at what to expect when GE finally gives guidance on its energy segment – something CEO Larry Culp promised he would do soon.
What the bulls were waiting for GE
Enter the results report, we positively viewed GE in 201
Image source: Getty Images.
The hope was that GE's management would do their utmost to reduce the losses on GE Power to reset Expectations of future margins to expand a low base.
Unfortunately, investors had the low base but not the guidance reset – and they did not receive much encouragement that the power segment was on time.
For example, after a $ 631 million loss from GE Power in the third quarter reported a loss of $ 872 million in the fourth quarter, taking the full-year segment loss to $ 808 million – recalling that GE started the year expecting around $ 2.45 billion in profits from the segment. In addition, Culp and CFO Jamie Miller reported that the energy segment had a cash flow of $ 2.7 billion in 2018.
Lack of detail
Listen to earnings presentations, lack of detail on key questions did not do much for the bullish case as outlined above.
For example, when Barclay's analyst Julian Mitchell asked for earnings from power with such things as cost and project execution overruns was removed – perhaps to try to figure out what GE's Underlying Revenue Revenue might be without the one-off effects. He was not given any specific details.
Analyst Joe Golditch Sachs, Joe Ritchie, asked if $ 2.7 billion cash flow outflow at GE Power in 2018 would improve or worsen in 2019 but again failed to give management details.
When Cowens Gautam Khanna raised a key question when pricing is expected to be lost in the transactional aftermarket, and how pricing is now comparing it to what it was a year ago, Russell Stokes, former head of GE Power, highlighted the internal improvement management expected to do with their transaction services. GE Power's contract services were seen as good results.
Furthermore, former CEO John Flannery claimed that GE Power could improve the margin from 5.6% in 2017 to 10% in a few years, partly to maximize the value of the transaction services. However, the improvement has been slow, with Miller mentioning that she had seen the transaction services "margin rate up, in some cases, 10, 12, 15 [hundredths of a percentage point] on that order book." She added that "it has been consistently increasing throughout the year", but GE is "not yet seeing all that goes through, mainly due to field execution issues and operational issues."
It is far from the two to two percentage points that Flannery posted as a long-term goal for improving the transaction service margin.
What Culp does with it
Culp is paying more attention to reducing costs and restructuring GE Power. Separating into two devices (gas equipment and services in one unit, with the rest in another), facilitates selling / interacting with one of them and could improve the transparency of performance.
Furthermore, GE's grid, solar and storage assets move to renewable energy means that business now has an "end-to-end offer for Renewables customers as the demand for renewable power and network integration continues to grow globally," Culp said.
What can investors expect from GE's guidance
When everything is put together, it seems likely that GE's near-time management segment management will not be pretty, but what about the medium term? Credit rating agency Fitch has said it can downgrade GE's rating if GE Power is not on track to break through 2020 with expectations or margin improvement to the mid-high single digits.
Investors should be happy if Culp gives it that kind of guidance. After all, improved equipment margins will be tough in a falling end market, and we have already seen that transaction marginal expansion is difficult, so it basically goes cost-saving – something that Flannery thought could add three to five percentage points of mid-term margin expansion.
All told, the key is the guidance on the GE Power margin and using the 5.6% figure in 2017 as a base, it is reasonable to expect that Culp will head towards a high figure figure by 2020 If he does, the stock rise may in 2019 get a new wind.