General Electric (GE 10.31, +0.28, +2.84%) is trading
higher this morning despite warning about near-term financial results.
Investors had been patiently waiting for the company to throw out everything
but the kitchen sink in order to pare expectations going forward.
Simply put, 2019 is a reset year for the company. Investors are finding solace in the fact that 2020 and 2021 will be meaningfully better.
GE did not provide detailed guidance for fiscal 2019 when it reported weak fourth quarter results in late January, but Chief Executive Larry Culp followed up with a very detailed, sobering outlook this morning.
GE guided for fiscal 2019 adjusted EPS of $0.50-0.60, which was below the $0.69/share S&P Capital IQ Consensus. The weak earnings outlook does not come as a surprise.
Looking at the GE Industrial segment, the company guided for organic revenue growth in the low to mid-single-digit range, margins flat to up 100 basis points and free cash flow in the breakeven to ($2) bln range. Again, the weak cash flow did not come as a surprise given prior cautious commentary from analysts a forewarning from management about negative free cash flow last week.
Encouragingly, GE expects adjusted Industrial free cash flows to be positive in 2020, with the pace of improvement accelerating in 2021.
Chief Executive, Larry Culp, laid out a detailed path toward righting the ship but admitted it won't necessarily be a smooth path. The company warned that first quarter earnings would be down significantly and improve thereafter. While results will remain hairy with a lot of moving parts, management did a great job of laying everything out.
GE is focused on deleveraging. Transportation, BioPharma, BHGE, and other smaller divestments are improving its financial position. The company reaffirmed its GE Industrial net debt/EBITDA target of <2.5x and its GE Capital debt/equity target of <4x.
The Power segment was the primary drag on results and fixing that is a top priority. Power revenue is expected to fall in the high single digit range this year before growing next year on better margins with negative but significantly improved free cash flow.
The company will be playing offense in Aviation and Healthcare with a better line of sight and expectations for improving revenue and margins.
Meanwhile, the company is focused on continued restructuring and cutting corporate overhead costs.
GE has finally cleared the air. Larry Culp's very strong reputation has investors hoping the worst has passed now that expectations have been set for a difficult 2019.
Coming into today, the stock traded at an EV/EBITDA multiple of ~14x, which was on par with Honeywell (HON) and 3M (MMM). A rising stock price and lower earnings estimates may increase that multiple today, but investors now have a clearer path to improvements down the road.
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