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GE Soars to 15-Month High as Cash Outlook Buoys Turnaround

Richard Clough
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GE Soars to 15-Month High as Cash Outlook Buoys Turnaround

(Bloomberg) -- General Electric Co. soared to a 15-month high after the company said cash from its manufacturing operations is likely to rise in 2020, buoying Chief Executive Officer Larry Culp’s effort to rescue the iconic maker of jet engines and power equipment.

Industrial free cash flow, a closely watched indicator of earnings potential, is projected to climb to as much as $4 billion this year from $2.32 billion in 2019, GE said in an earnings statement Wednesday. Wall Street had been expecting $2.2 billion for this year.

GE had a “very strong close to the year on cash,” Culp said in an interview. The improvement in the numbers and in factories “gives me a lot of encouragement relative to ’20.”

The results underscored Culp’s slow-and-steady approach to rebuilding GE’s balance sheet and restoring the company’s battered reputation. Slumping cash flow had been at the heart of GE’s recent downturn, one of the worst in its 128-year history.

The shares jumped 10% to $12.94 at the close in New York, the highest price since October 2018, the month Culp became CEO. GE soared 53% last year, far outpacing the 29% rise in the S&P Index. Still, that was only enough to recover a portion of GE’s collapse in the previous two years, which wiped out more than $200 billion in shareholder value.

Bank of America Corp. upgraded GE’s stock Wednesday to buy, with analyst Andrew Obin calling the cash outlook “materially higher than our prior forecast.”

GE generated $3.9 billion in fourth-quarter free cash flow from its industrial business. The 2019 annual figure of $2.32 billion topped GE’s forecast as well as the $1.3 billion expected by analysts. Early last year, GE predicted burning as much as $2 billion, before raising the forecast several times.

“FCF is the most important metric to judge GE’s progress on its multiyear turnaround,” Deane Dray, an analyst at RBC Capital Markets, said in a client note. The initial cash forecast topping expectations “should be considered an upside surprise.”

Earnings Climb

The Boston-based company’s fourth-quarter profit beat expectations. Adjusted earnings rose to 21 cents a share, above the 17-cent average of estimates compiled by Bloomberg. Sales fell 1% to $26.2 billion, while Wall Street anticipated $25.3 billion.

The results were bolstered by the aviation unit, which logged a 5.7% rise in sales and a 22% increase in orders despite grappling with challenges from Boeing Co.’s 737 Max crisis. GE Aviation, through a joint venture with France’s Safran SA, makes the Leap engines for the narrow-body jet, which was grounded in March after two deadly crashes.

While the Max grounding restrained GE Aviation’s cash flow in the quarter, the division’s sales were boosted by demand for the Leap engine, which is also used to power Airbus SE’s A320neo.

GE said it anticipates a return of the Max in mid-2020, in line with Boeing’s forecast. GE expects to sharply trim deliveries of Max engines this year.

“There are far more moving pieces this year than we had last year” regarding the Boeing aircraft, Culp said. He said the grounding was one of the biggest variables affecting this year’s cash flow.

Power Drop

Quarterly orders tumbled 30% in the power-equipment unit, which has been struggling for several years amid a global market slump. Sales were essentially flat. Still, Culp said there are “signs of stability” in the operation, including improvement in the service business and in cash performance.

While fixing GE Power has been a top priority since Culp took the helm at GE, the CEO said he would turn his attention more toward fixing the ailing renewable-energy unit. Fourth-quarter orders fell 11% in that business, which posted a loss of almost $200 million.

Offering its first look at 2020 expectations, GE predicted adjusted earnings of 50 cents to 60 cents a share, while analysts have predicted 67 cents. Organic sales for the manufacturing business will grow in the “low-single-digit range,” GE said.

GE plans to provide detailed segment forecasts in March.

(Updates with closing shares in fifth paragraph)

To contact the reporter on this story: Richard Clough in New York at rclough9@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson, Susan Warren

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