The GE share is up because it lifted the veil of its power department
Photo by Sebastien Bozon / AFP / Getty Images
Text size
Investors seem to be optimistic about
General Electric
share, even after the company said Thursday, would make less money this year.
The company, which also held analyst day on Thursday, assumed to earn about 55 cents per share in 2019, lower than Wall Street had predicted. But the stock was recently up 3.1% anyway, while
Dow Jones Industrial Average
is flat.
Why optimism? General Electric (ticker: GE) has been working in recent months to put liquidity problems in bed by selling assets and shrinking lending operations. On Thursday, the company provided new information on cash flow and failing power division. Some of the extra details are the big reason why investors re-invest the stock.
Background. Since taking over a CEO, Larry Culp has often repeated its top priorities for the company: cutting debt and reversing GE Power.
And Culp has taken decisive action on the debt front. GE has made several agreements, including the sale of the biopharma business to
Danaher
(DHR) and merge GE's locomotive business with
Wabtec
(WAB).
What's new. Now, the investor gets attention to the power franchise. The division lost $ 800 million last year after sales fell 21%. Power revenues are still falling. GE said that sales in 2019 would be down to "high single digits percentage points." But the management allowed the business to grow again in 2020.
To handle sales, GE plans to spend $ 800 million in costs. Culp said GE was "slowly embracing the world of markets" on power. The gas turbine market has been cut in half since 2015. But Culp added that he is ready to shape the business for the new reality.
GE also provided a detailed overview of the cash flow. Working capital – which is cash involved paying vendors and charging customers – requires more money this year, creating a headwind. But it shouldn't come again.
Cash conversion costs will also remain high, and GE still has to do
Alstom
Pension contribution through 2022. Alstom is an energy purchase for 2015 which generated a receipt of NOK 22 billion. GE says that most of its cash flow problems are one-time in nature.
It is important that the cash flow in the aviation business is expected to remain strong – in excess of NOK 4 billion this year. It is comforting for investors.
Cash flow is a controversial problem with Wall Street analysts, with free cash flow estimates by 2020, from 35 percent to $ 1 per share. "Cash in long-term businesses can be volatile," said CFO Jamie Miller Barrons . "When these businesses grow or shrink, you have counterintuitive cash dynamics." This means that money and earnings do not always match, but GE is confident that cash flow will improve in the future.
Looking ahead. Culp said 2019 is about actions and not words. It is true. GE led, for example, to positive operating margins in the power department for 2019, which would be at least 3 percentage points better than last year. If they fail to do so – or to take income guidance in Culp's first full year as CEO, investors will penalize the shares.
Write to Al Root at allen.root@dowjones.com
