GE's cash flow will collapse in 2019 – The Motley Fool

In 2018, General Electricof (NYSE: GE) Adjusted free cash flow dropped by more than $ 1 billion from the previous year to $ 4.5 billion. This was well below management's initial expectations for free cash flow of between $ 6 billion and $ 7 billion. In addition, CEO Larry Culp suggested at the end of January that GE was reporting that free cash flow would deteriorate further this year.

Earlier this month, Culp shocked investors when he said at an investor conference that free cash flow would likely become negative in 2019. Thursday, GE gave more money. details on its outlook for 2019 and the following years. Fortunately, the company's cash forecast for 2019 is not as bad as some people had feared, and GE expects a strong improvement over the next two years.

Set expectations for 2019

General Electric expects to generate negative free cash flow of up to $ 2 billion this year, despite growth in revenue and a modest increase in margin on an adjusted basis.

There are many reasons for this big difference. The largest contributor to GE's expected decrease in cash flow is the significant increase in restructuring costs as the Company strives to reduce its indirect costs and energy-related activities in particular.

GE also expects cash flows generated by the energy sector, which spent $ 2.7 billion last year, to turn into negative territory in 2019. Restructuring expenses, the main obstacles in terms of cash flow are cost overruns of approved projects with too aggressive assumptions and legacy costs that are mainly related to the acquisition AlstomThe power of business.

A third major reason for the expected decline in GE's cash flow in 2019 is that the renewable energy sector is expected to grow from approximately $ 500 million in free cash flow last year to a reduction in cash flow in 2019 Changes in working capital are largely in the same year. year contrary wind.

Management expects a huge improvement in 2020 and 2021

In parallel with the presentation of its outlook for 2019, GE management has stated that free cash flow should rebound sharply into positive territory next year, with further improvement in 2021. Of course, some skeptics fear that these projections are too optimistic. Let's see why GE executives are confident in a strong recovery in free cash flow.

First, cash restructuring costs will begin to decline in 2020 and will decline significantly in 2021. Secondly, GE will achieve significant cost savings by 2021. Management estimates that the company's overhead costs will decrease by at least $ 500 million compared to 2019. The overhead of the food unit could further decline, while GE Power would also benefit from a streamlining of its manufacturing footprint and services. Thirdly, GE will face most of its "non-operational" problems – such as legal settlements and unprofitable heritage projects – over the next two years.

In fact, GE estimates that its energy and renewable energy sectors will both generate positive free cash flow in 2021. By comparison, they are on track to spend $ 4 billion or more on a per-share basis. combined this year.

Disposals of assets will have a negative impact on cash flow over the next two years, but the reduction in interest expense and organic growth in the health and aviation sectors of the United States. GE should more than compensate for this inconvenience.

GE has not accurately quantified the exact level of free cash flow in 2021. However, it is expected to significantly exceed the $ 4.5 billion achieved in 2018 – with significant growth potential for the coming years , as GE Power picks up steamy growth.

GE's stock has tons of potential

Investors applauded GE's outlook, sending GE shares up almost 3% to $ 10.30 on Thursday. However, this remains below the level reached by the stock achieved a few weeks ago, after GE announced a $ 21 billion contract to sell its biopharmaceutical business in the UK. Danaher, which will allow the company to reduce its debt quickly. And it is close to 70% lower than GE's high multiyear stock reached less than three years ago.

Market performance of General Electric. Data by YCharts.

If GE could reach its targets for 2021 and make further improvements thereafter, its free cash flow could reach $ 1 per share by 2022 or 2023. This would potentially warrant a GE stock price action that could to reach 20 USD.

This would still not erase all investor losses of the past two years. However, these costs are irretrievable. After a 10 year bull market, there are not many stocks that have a good chance of doubling over the next three to four years. As a result, GE's shares could generate higher-than-market returns for investors.