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Jan 26, 2021

GE soars as cash outlook shows turnaround regaining traction

Gordon Reid discusses General Electric


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General Electric Co. signaled renewed progress for Chief Executive Officer Larry Culp’s turnaround effort with a cash-flow outlook that surpassed Wall Street’s expectations.

Industrial free cash flow will be US$2.5 billion to US$4.5 billion this year, GE said in an earnings statement Tuesday. The midpoint of the range handily exceeded the US$2.57 billion average of analyst estimates for the closely watched metric. GE also resumed providing an earnings forecast -- a sign that the uncertainty caused by the coronavirus pandemic is beginning to abate.

The outlook provides a new boost for Culp’s drive to rescue the maker of aircraft engines, power turbines and medical scanners from an epic corporate collapse. While the pandemic upended that effort early last year, GE came roaring back in the fourth quarter to generate US$4.4 billion in industrial free cash flow, smashing analyst estimates and more than offsetting the cash burned during the first nine months of the year.

“Momentum is broadening and deepening across the company,” Culp said in an interview.

“We have as much conviction as we ever have relative to those aspirational targets of high single-digit free cash yields at GE,” he said, referring to the cash-flow margins that the company has set as a longer-term target.

The shares rose 3.3 per cent to US$11.35 at 3:29 p.m. in New York after surging as much as 11 per cent to the highest intraday level since last February. GE fell 6.1 per cent during the 12 months ending Monday, compared with the 5.5 per cent advance of a Standard & Poor’s index of U.S. industrial companies.

The cost to protect against a GE default dropped to the lowest since February 2020 and the company’s bonds rallied.

Analysts had predicted that GE would generate only US$2.8 billion in industrial free cash flow during the fourth quarter and end the year with a cash burn for 2020 as a whole. Instead, GE brought in about US$600 million after deep cost cuts and cash-preservation actions across its industrial divisions.

The company eliminated some 20,000 positions, roughly 11 per cent of its payroll, Chief Financial Officer Carolina Dybeck Happe said on an earnings call.

“Lingering liquidity concerns have now likely been put to rest considering the company’s generation of US$4.4 billion” in free cash flow in the fourth quarter, John Inch, an analyst at Gordon Haskett, said in a note to clients. “Much of the GE story now continues to rest on aviation, including prospective recovery due to the vaccine roll-outs.”

Aviation Uncertainty

An uptick in air travel will take time to materialize. During the first quarter, global flight departures -- which GE tracks as a gauge of demand for spare parts and repair work -- should remain in line with the final months of 2020, as surging COVID-19 cases stunted a nascent rebound in air travel.

Aftermarket shop visits in January are down roughly 45 per cent versus pre-pandemic levels, while new and spare engine installations are down as much as 40 per cent, according to a company presentation.

For the year as a whole, GE forecast adjusted earnings of 15 cents to 25 cents a share. That trailed expectations of 38 cents a share.

While Culp said the company doesn’t expect a rapid return in demand for air travel, GE’s conversations with airlines and fleet planning indicate that flight departures will rise later this year.

“We’re looking at a first half of the year that’s being carried by health care and the turnarounds in power and renewables,” Culp said. “We’re not waiting for a miracle or a rapid snap-back in aviation.”

Power Orders

During the fourth quarter, adjusted earnings fell to 8 cents a share, trailing the 9.2-cent average of analyst estimates compiled by Bloomberg. Sales slid 16 per cent to US$21.9 billion. Analysts had expected US$21.8 billion.

The aviation division suffered the deepest sales decline among GE’s industrial businesses, with a 35 per cent revenue drop.

Orders jumped 26 per cent at GE Power during the last three months of the year. GE’s gas-power operation delivered positive free cash flow in 2020, a year ahead of schedule, in a sign of progress at a major source of the company’s financial troubles before the pandemic.

GE’s renewable energy unit reported a 34 per cent increase in orders, spurred by deals to supply mammoth offshore wind turbines to several projects planned on the U.S. East Coast.

“The free cash flow guidance for 2021 was encouraging, particularly given the strong FCF performance in fourth quarter,” Julian Mitchell, an analyst at Barclays Plc, said in a report. “The margins missed our estimate in Power and Renewable, but we think this is offset by the strong orders performance at both, in terms of the ‘forward look.’”