General Electric shares pop on better-than-expected industrial cash flow, rosy outlook

Shares of General Electric rose by almost 5% in morning trading Tuesday after the company reported better-than-expected industrial free cash flow for the fourth quarter and a rosy outlook for this year.

The stock briefly jumped by more than 10% just before the markets opened Tuesday, but shed some of those gains.

The company closed the fourth quarter with $4.37 billion in industrial free cash flow, a surprise after CEO Larry Culp projected at least $2.5 billion for the last three months of the year. The strong quarter pushed the company’s industrial free cash flow into positive territory for the year.

GE also projected it would generate $2.5 billion to $4.5 billion in industrial free cash flow for 2021.

The company also reported a revenue for the fourth quarter ended Dec. 31 that slightly beat analyst expectations while its profits fell short of estimates as the industrial giant continues to weather the coronavirus pandemic.

Here’s how GE performed compared with what Wall Street expected, based on average analysts’ estimates compiled by Refinitiv:

  • Adjusted EPS: 8 cents versus 9 cents expected.
  • Revenue: $21.93 billion vs $21.83 billion

The company’s better-than-anticipated revenue for the quarter was down 16% from a year earlier. On an unadjusted basis, the company reported diluted net earnings per share of 27 cents.

“As 2020 progressed, we significantly improved GE’s profitability and cash performance despite a still-difficult macro environment,” Culp said in a statement. “The fourth quarter marked a strong free cash flow finish to a challenging year, reflecting the results of better operations as well as strong and improving orders in Power and Renewable Energy.”

The 129-year-old industrial conglomerate makes jet engines, gas turbines and more and provides some financial services. It no longer manufactures the appliances and lightbulbs it made its household name on in the 20th century, as the company slims down and focuses on turning profits.

Culp said on a conference call with analysts the Covid pandemic “hit us hard,” but the company managed to strengthen its financial position through the year. He added that the company plans to “play more offense in 2021.”

JPMorgan analyst, Steve Tusa, who called GE’s fall years ago, said in a note to clients Tuesday that the company’s fundamentals were largely in line with expectations for the quarter, though free cash flow was surprisingly high.

“Bottom line, FCF carries the day on earnings as usual, but the underlying performance here is not too far outside the realm of what we had been expecting,” he said.

Gordon Haskett analyst John Inch, who has a hold rating on GE and price target of $7, was unimpressed by the beat on cash flow. He told clients that “strong free cash has been a hallmark of the recession for almost all industrial companies that have released working capital due to weak sales.”

The company’s fourth-quarter performance was driven largely by a rise in orders in its power and renewable energy businesses, which offset declines in aviation and health care. GE CFO Carolina Dybeck Happe told analysts that all segments except for aviation improved cash flow and “ended the year stronger than they began.”

GE’s power business reported a 26% year-over-year rise in orders to $5.62 billion for the quarter, driven largely by strong sales of gas power equipment. The company was able to lower fixed costs in its gas power business by 12%, allowing it to deliver positive cash flow for 2020, a year ahead of schedule.

The renewable energy segment reported $6.29 billion in orders, up 34% from a year earlier. Revenue in the segment fell about 6% from a year earlier to $4.44 billion.

Orders in the beleaguered aviation unit, once the company’s cash cow, fell 41% from a year earlier as the pandemic wrecked air travel in 2020. GE noted in its 2021 outlook that it “assumes Aviation revenue being flat to up year-over-year, which is dependent on the Commercial Aviation market recovery accelerating in the second half of 2021 as well as the timing of aircraft deliveries.”

The health-care segment reported $4.98 billion in orders, down by about 15% year over year. But GE attributed the decline mostly to the sale of its biopharma business in March.

“Over the past year our team proved resilient, and momentum is growing across our businesses,” Culp said. “We are in leading positions to capture opportunities in the energy transition, precision health, and the future of flight.”

GE’s financial services arm, GE Capital, reported a net loss of almost $200 million, driven largely by the company’s $200 million settlement with the Securities and Exchange Commission. Without admitting or denying wrongdoing, the company agreed to pay the fine for allegedly misleading investors by failing to disclose accounting changes in its power and insurance divisions that made its earnings look better.

Culp said on Tuesday’s call that the range of its 2021 performance will be largely determined by its performance in aviation.

GE was doubly exposed to the pandemic’s impact on air travel through aviation, a longtime jewel, that makes and services aircraft engines, and its aircraft leasing unit. The company is betting on an increase in deliveries in 2021 as Boeing 737 Max deliveries resume. GE and French company Safran make the planes’ engines through their CFM joint venture. Federal regulators late last year cleared the jets to fly again after Boeing made a series of safety-related changes following two fatal crashes and began delivering the planes last year

But efforts to predict the recovery of air travel have proven largely inaccurate. Airline executives in recent weeks have warned they face a difficult start to 2021. Bookings dropped from the end-year holiday peak along with a spike in Covid infections and more contagious strains of the virus that have prompted new travel restrictions spanning the U.K. to the U.S. to South Africa.

Culp warned on Tuesday that the whiplash of volatile demand for GE’s jet engines and maintenance services has strained its supply chain.

“Our supply chain has been through a roller coaster,” he said. “We are working as closely as we can with the supply base to help them do what we’re doing, and that is work through the near term when we have these volume pressures, but also be ready for a number of scenarios by which we see a return toward more normal volumes.”

The stock has been on a tear in recent months, sparked by a surprise third-quarter profit reported in October that sent the stock surging by more than 70% over the fourth quarter. Positive vaccine news, which bodes well for aviation, has sustained the rise.

And some investors are bullish on the company’s turnaround under Culp, especially as he forecasts positive cash flow for 2021. GE has continued to pay down its debt during the pandemic and cut costs through, for example, layoffs in its aviation business.

CFO Dybeck Happe said the company reduced headcount by 11% in 2020 and noted that the company continues to shore up its finances by selling off its stake in Baker Hughes. The company reduced debt by $16 billion in 2020 and ended the year with $37 billion in liquidity.

— CNBC’s Leslie Josephs contributed to this report.

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