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Call General Electricof (NYSE: GE) the first quarter results "good" would be a little exaggerated. After all, the struggling industrial conglomerate said its adjusted industrial operating income was down 14% from the previous quarter, bringing adjusted earnings per share down to $ 0.14 from $ 0.15 a year. earlier.
Nevertheless, GE's first quarter results exceeded management's expectations and consensus among analysts. In addition, it is the second consecutive quarter that GE publishes a report on its results without major negative surprises. As a result, investors are increasingly confident that the company is finally getting back on track under new CEO Larry Culp. That propelled GE shares to a 4.5% gain on Tuesday, following the earnings report.
Dig in the numbers
GE 's revenues declined 2% from one year to the next to reach $ 27.3 billion last quarter. However, the decline in operating revenues was caused by the many asset sales realized by General Electric over the last year. The organic business figure of its industrial activities is up 5%.
In addition, GE announced strong order activity for the quarter, which bodes well for future growth. Industrial orders increased 1% to $ 26.2 billion, primarily due to continued strength in the company's aerospace business.
In terms of profitability, GE's adjusted industrial operating margin declined from 8% to 8.8%, compared with 10% a year earlier. This decline was expected mainly due to non-recurring items in the renewable energy sector. GE also announced a decline in margins in its food and aviation sectors, as GE Power is still in the early stages of recovery and the aviation sector is facing short-term hurdles because of the ongoing transition to the new LEAP family of engines. Boeing (NYSE: BA) and Airbus"Narrow-body jets at high volume.
GE Power reported a profit in the last quarter despite a contraction in margin. Source of the picture: General Electric.
Finally, adjusted industrial free cash flow increased from $ 1.7 billion last year to $ 1.2 billion. This exceeded management's expectations.
Despite the decline in margin and the decrease in cash consumption in the last quarter, GE still expects a slight improvement in the margin, but a sharp decline in free cash flow in a full year. The company has also reaffirmed all other aspects of its forecast for 2019.
The Boeing 737 MAX is a new problem – but manageable
General Electric's management noted a new unfavorable wind that appeared last quarter: the global stranding of the Boeing 737 MAX. The LEAP-1B engine – produced by CFM, a 50/50 joint venture between GE and Saffron – powers all 737 MAX.
The good news for GE is that there is no evidence that the engines played a role in the two fatal accidents that led regulators to ground the Boeing jet. However, Boeing has slowed the production of its 737 family aircraft by almost 20%, unable to deliver a 737 MAX jet at this time. (Initially, he had planned to increase production by about 10% this year.)
This will definitely hurt GE in the short term. More specifically, there will likely be an impact on cash flow in the second quarter as CFM expects to be paid for engines installed on jets that can not yet be delivered. Fortunately, all the signs currently indicate that the Boeing 737 MAX will be recertified within a few months, after which this adverse wind is expected to ease. And in the longer term, even though some airlines decide to move away from the 737 MAX, the main models of competing aircraft mainly use LEAP engines.
GE's stock has great potential for patient investors
CEO Larry Culp was careful to warn investors that there would be ups and downs in GE's ongoing turnaround. But overall, the company's performance in the last quarter supports Culp's forecast, which is expected to improve significantly over the next two years, as legacy costs and restructuring costs subside.
At the same time, GE continues to reduce its debt and other obligations primarily through the proceeds from the sale of assets. Last quarter, it received $ 2.9 billion from the sale of its transportation division and also agreed to sell its biopharmacy business to Danaher for $ 21 billion. Debt reduction will respond to one of the biggest concerns investors face today about GE's actions.
Based on GE's guidance, free cash flow is expected to return positive next year and could reach USD 1 per share in the next few years once the company completes its recovery efforts. GE shares are still trading around $ 10, so there is a ton of shareholder benefits if the company is able to achieve its medium and long-term goals.
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