=General Electric (GE) reported earnings on Thur 31 Jan 2019 (b/o)

General Electric misses by $0.05, beats on revs

Reports Q4 (Dec) earnings of $0.17 per share, excluding non-recurring items, $0.05 worse than the S&P Capital IQ Consensus of $0.22; revenues rose 5.3% year/year to $33.28 bln vs the $32.16 bln S&P Capital IQ Consensus. Orders -1%, +4% organic; Industrial rev +2%, +8% organic, industrial profit margin -150 bps to 7.5%. By segment: Power rev -25%, orders -19%; Aviation rev +21%, orders +12%; Renewable Energy rev +28%, orders +19%; Healthcare rev +2%, orders -2%; Oil & Gas rev +8%, orders +21%, Lighting rev and orders -16%, Transportation rev +24%, orders -48%, Capital rev +60%. Financial goals: Sustainable credit rating in single A range; Industrial net debt/EBITDA <2.5x; Dividend payout in line with peers over time. Announced a $1.5 billion settlement in principle with the Department of Justice.

General Electric Earnings Preview

General Electric (GE) is set to report earnings Thur 1/31 before the market opens with a conference call to follow at 8am ET. Current Capital IQ consensus stands at EPS odf $0.24 on Revenue of $32.16 bln.

• Shares of GE have enjoyed a strong start to 2019 as the stock has rallied 22% and 35% since hitting the December 12 lows of $6.71. Certainly investors have been warming up to the stock as it bears a great name brand an attractive valuation. The idea of the January Effect is also at play. Part of the turn around has centered around the reversal of an opinion by long time bear, J.P. Morgan Analyst Stephen Tusa, who raised his rating to Neutral from Underweight. Mr. Tusa was a long time bear and been viewed as the axe in the name given his past calls on cash flow concerns and operations. So a turn in sentiment was notable. But the language around the upgrade also should be taken into account as his caution around the name remained, Mr. Tusa just felt that some of the large unknowns had seen some improved visibility and the price was more reflective of these worries. That was enough to lead early investors into the name. Now we will see if they will be rewarded with improved operational results.
• The other aspect of the stock recovery has also been the appointment of former Danaher (DHR) chief Lawrence Culp to CEO. Mr. Culp has a good track record with his DHR turn around and one of the primary fears for investors was GE dragging its feet on some sales of business units deemed necessary to improve the balance sheet and stream line operations. He also took the difficult step of cutting the dividend to one penny which many viewed as a necessary evil in order to improve free cash flow. But there remains worries about further potential large cash needs at GE Capital which was brought up on the past earnings conference call. And comments from the last call also pointed towards slow downs in some of the primary industries. In order for the stock to hold its recent gains GE will need to show some marked improvements in its operations. Also any additional comments around divestitures would be welcomed.

Will the market finally get the Healthcare IPO announcement? 

• One area that would help improve sentiment around GE is if the company presses forward on its healthcare business. GE's health business has $20 bln in annual revenue and generates approximately $4.4 bln in EBITDA. GE competitor Siemen's (SIEGY) sold a stake in it's healthcare unit earlier in 2018. Heathineers generated $16 bln in revenue and $3 bln in EBITDA and runs around 14x EBITDA. A similar valuation for GE Healthcare would run a valuation of approximately $60 bln according to a recent Barron's article. This is some real potential value for GE which currently trades at a Market Cap of $77.3 bln.

November 12 CEO Culp interview on CNBC

• There is no higher priority right now than bringing down the leverage level and there is plenty of opportunity to do that with asset sales
• There's very much a sense of urgency with asset sales and quotes John Wooden's perspective, "Be quick, but don't hurry."
• We're getting close to a bottom in power business and we'll know when we're there
• Plan to sell 19% of healthcare business, or possibly more, is on track
• Cutting the dividend was the right decision
• Aviation business is our "crown jewel"
• Stock is on sale and company has no plans for an equity raise. As conditions change in future, might come back and do that but not planned at this time.

Q2 Recap

• GE reported Q3 (Sep) earnings of $0.14 per share, excluding non-recurring items, $0.06 worse than the S&P Capital IQ Consensus of $0.20. Revenues fell 3.6% year/year to $29.57 bln vs the $30.08 bln S&P Capital IQ Consensus.
  • Power orders -18%,
  • Renewable Energy orders -3%,
  • Aviation orders +35%,
  • Oil & Gas orders flat,
  • HealthCare flat
• GE reduced its quarterly dividend from $0.12 to $0.01 per share beginning with the Board's next dividend declaration, which is expected to occur in December 2018. This change will allow GE to retain ~$3.9 billion of cash per year compared to the prior payout level.
• GE announced plans to reorganize Power to accelerate the business' operating and financial improvements.GE plans to create two units - a unified Gas business combining GE's gas product and services groups, and a second unit constituting the portfolio of GE Power's other assets including Steam, Grid Solutions, Nuclear, and Power Conversion. The Company also intends to consolidate Power's headquarters structure to ensure these units can best serve their customers.
• Larry Culp: "My priorities in my first 100 days are positioning our businesses to win, starting with Power, and accelerating deleveraging. We are moving with speed to improve our financial position, starting with the actions announced today. I look forward to updating you further on our progress in early 2019."