Categories AlphaGraphs, Earnings, Industrials

Earnings Preview: General Electric to report Q1 results amidst multiple headwinds

General Electric (GE) stock has shown some respite this year increasing 26% comparing to 50% plunge it saw in 2018. The industrial giant has been working hard on a turnaround to retain its mojo by selling off non-core assets and trying to pare down its debt and improve cash flows.

Earlier this month, antitrust regulators in the EU slapped a $58 million fine on GE for providing misleading information to the regulator a couple of years ago when the company acquired LM Wind, a rotor blade manufacturer based in Denmark. This adds to the woes of the already beleaguered firm which has been fighting multiple battles to restore confidence among shareholders.

Looking Ahead

Last month, the industrial giant provided 2019 outlook which expects GE Industrial returning to positive free cash flow (FCF) only in 2020 and improving in 2021. The company also added that for the current fiscal adjusted free cash flow for GE Industrial to be between negative $2 billion to zero.

GE CEO Larry Culp said, “GE’s challenges in 2019 are complex but clear.” Adjusted EPS for fiscal 2019 is expected in the range of $0.50 to $0.60 on revenue growth of low-to mid-single-digits.

At the end of 2018, the company debt stood at $110 billion. GE Capital’s debt was $43 billion and the rest was from the GE side. General Electric needs to execute its plans to perfection to pare down the debt and reduce leverage as per the forecast provided last month. It’s worth noting that the market cap of GE is around $83 billion.

Q1 Expectations

Against this backdrop, General Electric is scheduled to report its first-quarter results on Tuesday before the market opens followed by a conference call at 8:30 AM. Since the company has already provided an outlook for the year, there wouldn’t be many surprises expected by investors on April 30.

For the first quarter, analysts expect the top line to come in at $27.05 billion, down 5.6% over last year. Adjusted EPS is forecasted to shrink 7 cents to $0.09 per share.

Key Segment Performance

Power Division: Facing multiple headwinds along with excess capacity and delay in execution of projects. The company is splitting the segment into two units: Power and Gas Power. Gas Power is expected to see improved margins with the help of growth in transaction services, while Power unit would be impacted by ongoing restructuring activities, legal issues, and project-related headwinds. GE expects FCF to be positive only in 2021.

Renewable Energy: Revenue to see improvement in 2019, while margins would be contracted over last year. The significant impact would be from ongoing trade war between the US and China, Alstom joint venture and pricing pressure due to increased competition and reversal of production tax credit (PTC) cycle. FCF expected to be positive only in 2021.

Healthcare: 2019 sales to see a growth of mid-single digits and margins to improve over last year. However, FCF would be lower over the prior year due to asset sales and supply chain finance transition. Headwinds would be from increasing inflation and tariffs.

Aviation: Strong demand for LEAP engine shipments is going to be a tailwind for the segment and for GE. It’s expected to benefit from strong growth in services and military lines. 2019  FCF is expected to be flat on revenue growth of high-single digits and margins of 20%. However, any impact of Boeing’s MAX deliveries due to grounding or reduced production would have a ripple effect on GE as LEAP shipments would be impacted.

Looking Back

Last quarter, General Electric saw a 5% increase in revenue of $33.3 billion helped by strong performance in the Aviation and Renewable Energy divisions. The Power unit fell another 25% hurt by industry-wide weakness. Earnings fell 60% to 17 cents compared to 22 cents expected by the street. For the fiscal 2018 period, adjusted free cash flow of GE Industrial fell 19% to $4.5 billion.

General electric Q4 2018 earnings
General electric Q4 2018 earnings

General Electric needs to make sure that its intended plans are executed to perfection. Since there are a lot of moving parts to make the puzzle work, any lapse in execution could make things worse for the firm. As stated by the company last month, investors would be hoping that 2019 would be a “reset year” and the following years would bring the mojo back to GE.

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