What no one is talking about in GE's Turnaround
Photograph by Sebastien Bozon / AFP / Getty Images
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Analysts and investors agree on what's most important to
General Electric
(GE): cash flow and determination of failing power department. It's not all that matters for the company's long-term success.
Following the investor incident in Thursday, a lot of analyst notes emerged, indicating industry-free cash flow and CEO Larry Culp's ability to turn GE Power. The company's 2019 earnings – and why its earnings don't matter – are other popular topics for Wall Street analysts these days, along with debt reduction.
All four issues are important to GE, but investors shouldn't forget another great thing: aftermarket parts and services for the company's turbines, engines, and healthcare. Understanding this market can help predict which cash flow will look like after the tournament is completed.
UBS analyst Peter Lennox-King tracks how many times different sentences are mentioned on earnings calls. It is an interesting metric that illustrates what Street is focusing on. During GE's fourth quarter earnings report, January 31, the word "services" did not delete the top 10. "Cash flow" was the king of the call.
After Thursday's event, the services didn't come much in analyst notes. Melius Research analyst Scott Davis commented that free cash flow in renewable business was disappointing. "[The wind business] is super competitive and lacks aftermarket service potential to compensate for the low profile [original equipment]," he wrote. Davis believes that GE can exit the renewable power generation business.
As Davis & # 39; comment implies, parts and service margins tend to be higher than the margins of original equipment. But how much higher? Think of an airline provider
TransDigm
(TDG), which has operating margins north of 40%. TransDigm generates most of its sales in aviation aftermarket, replacing parts that they have over time.
Honeywell International
(HON), on the other hand, also has a great deal of space and service industry and has a large original design franchise. Honeywell's aviation margins are a healthy 23%, but far from TransDigm's levels. At Honeywell's fourth-quarter conference call, management analysts said that higher original equipment shipments were a toll on overall aviation margins.
We can use some of this information to get a better sense of what GE's cash flow potential is on remaining industrial assets after the bulk of the restructuring is completed this year. Barron's estimates that GE's remaining industrial assets could generate at least $ 6 billion in annual cash flow.
Is our number correct? Probably not. But it's a useful rule of thumb. And the processing of original equipment businesses such as low-margin loss managers to forecast the future, refames the cash-generating potential of the GE service franchise. Market losses are dropping power, in other words, masking higher potential margins in parts and services.
No one is talking about service margins right now, but if Culp can cut fixed costs, service margins will bring center in the future.
GE was not immediately available to answer Barron's service margin questions. GE shares are down at 2.9% on Friday afternoon trading, at $ 10.00 and up 37.4% so far.
Write to Al Root at allen.root@dowjones.com
