|Bid||0.00 x 0|
|Ask||0.00 x 0|
|Day's Range||35.89 - 36.15|
|52 Week Range||28.47 - 38.19|
|Beta (3Y Monthly)||1.00|
|PE Ratio (TTM)||25.20|
|Forward Dividend & Yield||1.02 (2.91%)|
|1y Target Est||N/A|
Safran SA's (EPA:SAF) most recent earnings update in April 2019 signalled that the business experienced a significant...
(Bloomberg Opinion) -- General Electric Co. is learning the price of its credibility shortcomings.Shares of the embattled industrial giant plunged more than 15% at one point on Thursday after Bernie Madoff whistle-blower Harry Markopolos published a damning critique of the company’s accounting. Markopolos is working on behalf of an unidentified hedge fund that is betting GE shares will decline. The company calls his claims “meritless,” and CEO Larry Culp deemed the report “market manipulation” in an e-mailed statement. I read the report (all 170-plus pages of it), and my first instinct was that none of the allegations — which range from GE’s need to immediately bolster its long-term care insurance reserves with $18.5 billion in cash to looming writedowns on its stake in Baker Hughes to the generally confusing way the company represents its finances — are particularly new, at least not for those who have been paying close attention. The scale of the potential problems is bigger than any others have estimated, and the person making the claims has a track record of exposing fraud, having warned the U.S. Securities and Exchange Commission about Madoff’s Ponzi scheme years before it became public. But the line from the report that stood out to me the most was this one: “Who’s being transparent — them or us?”The market is giving its verdict. A series of broken promises, presentation “errors” that later have to be corrected, a continuing tendency to micromanage Wall Street expectations to orchestrate optical “beats” and an unwillingness to do away with heavily engineered earnings adjustments have cost GE dearly in the credibility department. Regardless of the truth of Markopolos’s report — and again, there’s plenty to debate there — GE has surrendered the high ground in its defense.Just this week, Steve Winoker, GE’s head of investor relations, issued an update on the company’s power unit and sought to clarify “confusion” about the number of 7F gas turbines it has installed. GE says it has 900 units in service, which is up relative to the year-end total of 2017 and 2018. But marketing materials from those years put GE’s 7F installed base at more than 1,100 units. Winoker says those materials lumped other types of units into the 7F tally. But there was really no room for that kind of interpretation in the wording of the brochure. This disclosure follows outgoing CFO Jamie Miller’s acknowledgment in May of the “confusion” created when she referenced an industry data firm’s calculation of power-equipment orders on an earnings call in a way that made GE’s business appear more robust than it was. At the Paris Air Show in June, in response to a question from JPMorgan Chase & Co. analyst Steve Tusa, Jean Lydon-Rodgers, CEO of GE Aviation’s services arm, said the company’s CF34 and CF6 engines account for “slightly less” than half of repair shop visits, raising questions about how exposed that business may be to a drop in profitability once those older models are replaced. In a follow-up e-mail to investors, Winoker clarified the number is actually just less than a third.Maybe these are all inadvertent errors. But for a company that clearly needs to do more to bolster its transparency and credibility, it’s a troubling fact pattern and puts it on the back foot when countering Markopolos’s allegations.The primary focus of Markopolos’s analysis is GE’s long-term care insurance business, which he argues needs an immediate $18.5 billion cash influx with a $10.5 billion non-cash GAAP charge looming over the next few years because of tougher accounting rules. That’s on top of the $15 billion reserve shortfall GE disclosed in January 2018. GE’s argument that insurance reserves are “well-supported for our portfolio characteristics” runs up against the contrast between what appears to be a deeply researched, numbers-heavy analysis by Markopolos and its own opaque commentary and financial presentations.Is Markopolos’s estimate correct? He bases it off an analysis of loss ratios and reserves for comparable policies at insurers such as Prudential Financial Inc. and Unum Group. His numbers seem dire, but GE itself warned in its annual filing that a more sober outlook for investment yields and the rate at which insurance claimants get healthier could force the company to put up additional pretax GAAP reserves, with some scenarios demanding a $12 billion increase. Estimating the appropriate reserve amount is a careful dance of assumptions of various puts and takes, and you’d need a crystal ball to accurately predict what’s required here. But the underlying point is that GE isn’t being nearly as conservative as it should be with this business, especially given looming accounting rule changes. I made that argument in February.He also argues that GE shouldn’t consolidate the Baker Hughes results in its numbers and that it’s avoiding a writedown on that deal. I’m less troubled by this because GE has disclosed the size of the potential impairment once its stake in Baker Hughes drops below 50%, and it does clearly break out the earnings and cash flow contribution from the business. What could end up being most problematic for GE is Markopolos’s brief allusion to the disconnect between the aviation unit’s $4.2 billion in 2018 free cash flow and engine partner Safran SA’s disclosure that it loses money on each Leap engine produced and won’t recover cost of goods sold until the end of the decade at best. The true underlying financials of that business have been a fixation for critics who contend it’s not as solid as GE makes it out to be.Markopolos obviously has a vested interest in pushing down GE’s share price. But the company would be wise to focus less on his motivations and more on refuting the specifics of his claims with hard numbers of its own. That would go a long way toward rebuilding investors’ trust.To contact the author of this story: Brooke Sutherland at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg Opinion) -- To get Brooke Sutherland’s newsletter delivered directly to your inbox, sign up here.A General Electric Co. earnings release is never a straightforward event; Wednesday’s felt particularly inconclusive. Turnarounds are prone to fits and starts, and at GE, it’s apt to be a particularly long and difficult road. There was little in the latest quarter’s results to convert doubters of CEO Larry Culp’s recovery efforts into believers, and, similarly, nothing concretely terrible enough to shake supporters out of their faith. On the positive side, there were signs of stabilization in the struggling power division. The unit posted operating profit of $117 million in the quarter, down significantly from a year earlier but hey, it wasn’t a loss. Orders were up 28% on an organic basis in the gas turbine side of the business. Also, GE raised its adjusted industrial cash flow guidance and now sees the potential to actually generate as much as $1 billion for the full year. That compares with a previous call for cash flow to be at best breakeven in 2019.It’s not really clear how we got to that raised guidance, though. GE says the improved outlook reflects better-than-expected first-half results for power and health care, and lower restructuring expenses and interest costs. It now says cash flow for the power business could be flat relative to last year’s $2.3 billion burn (adjusted for the reallocation of the grid operations to the renewable energy division), versus an earlier forecast for a substantial year-over-year weakening. Gordon Haskett analyst John Inch estimates a $500 million boost to expectations for the power unit. GE also said it thinks it can spend $500 million less on cash restructuring this year, while still achieving the same level of cost savings. This is odd. Recall that Culp’s predecessor John Flannery was ousted in part because of a perceived lack of urgency and aggression on cost-cutting. Analysts have debated how much more cost-cutting GE could actually do, given already comparatively low levels of back-office and R&D expenses and relatively high sales per employee. The European footprint GE inherited from the Alstom SA deal also complicates its efforts to fire people and shutter factories. For me, the lower restructuring bill raises questions as to whether the multi-year cost-cutting opportunity is as large as billed.Either way, working against the better power performance and lower restructuring expenses is GE’s estimate of a $1.4 billion hit to 2019 cash flow from operating activities if Boeing Co.’s 737 Max stays grounded through the duration of this year, a likely outcome at this point. GE provides the engine for the Max through its CFM International joint venture with Safran SA. One possible explanation is that Culp was trying to give the company room to fix itself in 2019 and set a low enough bar with his initial guidance that he could simply roll over it. Given GE’s past history with over-promising and under-delivering, I can’t knock the logic of this rationale. But if that is the case, it feels a little too carefully orchestrated. Why give guidance at all really if you’re going to be uber-conservative and continue to rely on heavily adjusted metrics? Why not let the results and the turnaround speak themselves? Perhaps the optics of a potential “beat” proved irresistible. It doesn’t change the fact that GE is losing some of its cash-generating ability through divestitures and likely to face historically low levels of cash flow for the next few years. One thing that seemed notably less carefully orchestrated was the announcement that Chief Financial Officer Jamie Miller would be stepping down. In an interview with Bloomberg News, Culp said this was his decision and he felt the time was right because “things were stable enough.” That suggests it’s a change he’s been contemplating for a while and was just waiting for the proper moment, which makes it all the weirder that GE announced the reshuffling without having a replacement lined up.NEVER-ENDING TARIFFS So much for the doldrums of August. President Donald Trump kicked off the typically quiet month by announcing the U.S. would slap 10% tariffs on $300 billion of Chinese imports not yet subject to duties because he doesn’t feel Chinese President Xi Jinping is moving “fast enough” to resolve trade tensions. The tariffs are set to take effect Sept. 1 and Trump has said he may even raise the duties to 25% or higher if talks with China continue to stall. The direct cost of this latest batch of tariffs will likely be incremental for industrial companies, with many of the products and components they import from China included in the $250 billion of goods already taxed by the Trump administration at 25%. It’s a much nastier surprise for consumer-goods companies like Apple Inc., which thus far have managed to stay out of the fray, and for the average American who’s about to see higher prices on some of their favorite toys and electronics. My Bloomberg Opinion colleagues Shira Ovide and David Fickling have great pieces out on this, which you can read here and here. But for manufacturers, this adds to a general environment of uncertainty that CSX Corp. CEO James Foote deemed “one of the most puzzling” economic backdrops of his career. With China reportedly contemplating blacklisting FedEx Corp. over the erroneous rerouting of packages involving Huawei Technologies Co. documents and products, Trump’s latest trade broadside could inspire retaliation against other U.S. companies. The slide in Boeing shares on the tariff news suggests investors are worried about backlash toward the planemaker, whether through canceled or scrapped orders or a tougher regulatory review of its grounded Max jet. More tangibly, this re-escalation of the trade war means the sales slowdown that was a frequent theme this industrial earnings season is unlikely to dissipate and instead set to get worse.This week brought more evidence of weakening demand from nVent Electric Plc, Gardner Denver Holdings Inc., Parker-Hannifin Corp. and even Siemens AG’s automation software business. The Institute for Supply Management’s gauge of U.S. manufacturing activity came in at 51.2 for the month of July, according to data released Thursday. That’s still indicates expansion, but it’s the fourth straight month of declines and the lowest reading in nearly three years. Thus far, manufacturers have generally been successful at passing along price increases and that, combined with stepped-up cost-cutting, has helped companies deliver earnings beats even as their sales growth slows. The durability of that dynamic will be tested if this wobbling in demand turns into a more clear-cut slump. There had been some hope that a Federal Reserve interest-rate cut would buoy the sector. Whatever push toward new investment may have been inspired by this week’s quarter-point reduction is likely now wiped out by this reopening of the trade-war tensions. Of course, there’s also the possibility that this tariff threat was Trump’s way of forcing the Fed into more rate cuts. Maybe it’s a bluff, like the threat to impose tariffs on all Mexican imports. Who knows? Meanwhile, the bright spots this week were strong numbers from Ingersoll-Rand Plc and Johnson Controls International Plc, which both posted much better organic sales and order growth for their HVAC businesses than we saw earlier in the reporting season from United Technologies Corp.’s Carrier unit and Lennox International Inc. We’ll see if that lasts. ROUNDING UP MORE PLAINTIFFSBayer AG is now facing lawsuits from 18,400 plaintiffs claiming the company’s Roundup weed killer caused their cancer; that represents an increase of 5,000 litigants since April. In a call this week to discuss disappointing quarterly earnings, Bayer CEO Werner Baumann moderately walked back the company’s resistance to settlement talks, saying he’d be open to a “financially reasonable” agreement as long as it resolves all Roundup litigation. The continued buildup in the number of claimants makes it less likely a settlement will meet both those criteria. Last month, a judge reduced a $2 billion jury award to a California couple to $86.7 million, following similar payout reductions in the other two Roundup cases that have gone to trial. But a lawyer representing that California couple noted that the average judgment per plaintiff now sits at $47 million. Every case is different and the awards per plaintiff are likely to be lower in a mass tort settlement, but that’s still a troubling precedent. Analysts’ estimates for a Roundup settlement range from $2.5 billion to $20 billion. Bloomberg Intelligence’s Holly Froum estimates $6 billion to $10 billion, given the surge in lawsuits, and said she’s skeptical a settlement would remove Roundup litigation risks for Bayer as non-parties who may claim injury in the future wouldn’t be bound to it. While Bayer agreed last month to sell the Dr. Scholl’s foot-care business to Yellow Wood Partners for $585 million and is looking to offload its animal-health business, the uncertainty surrounding the Roundup litigation likely limits its ability to consider a bigger breakup.DEALS, ACTIVISTS AND CORPORATE GOVERNANCEEaton Corp.’s second-quarter results released this week did little to endear analysts and investors to its current structure. While the company’s aerospace and electrical divisions put up strong numbers despite currency pressures and a more challenging economic environment, the hydraulics and vehicle units were disappointments, yet again. Eaton now estimates organic growth in the hydraulics business will be flat to up 1% for the full year, down from a previous guide of 3% to 4%. Margin expectations for that unit were also slashed. In the vehicle division, Eaton sees as much as an 8% decline in organic sales this year. Asked by Goldman Sachs Group Inc. analyst Joe Ritchie about the hydraulics unit’s long-term fit within Eaton’s portfolio, CEO Craig Arnold pointed out that the company’s overall performance was solid “despite the fact that we have one of our businesses that's not today firing on all cylinders.” That’s true, and yet while I’m wary of industrial companies’ passion for breakups going too far, “despite” is really the key word in Arnold’s comments. This isn’t a momentary slip-up for either the hydraulics or the vehicle business, and they’re increasingly perceived as more cyclical roadblocks holding up even greater margin improvement and sales growth for the overall company. Arnold has signaled in the past that if the company can’t get struggling businesses to targeted profitability levels, that could be a catalyst for divestiture.Parker-Hannifin agreed to buy Exotic Metals Forming Co. for $1.73 billion. The name might lead you to believe this company crafts metalworks on some sort of tropical island, but it’s based in Washington and makes complex high-temperature engine components and exhaust-management systems for aircraft including the Boeing 737 Max and Lockheed Martin Corp.’s F-35 fighter jet. On the one hand, the addition of Exotic Metals will boost the share of Parker-Hannifin’s revenue tied to faster-growing, more profitable aerospace products to more than 20% by Bloomberg Intelligence’s estimate, which will help to offset the sales slowdown in its industrial-products divisions. At about 13 times 2019 estimated adjusted Ebitda, the Exotic Metals deal is cheaper on that basis than the $3.7 billion acquisition of adhesives and coatings company Lord Corp. that Parker-Hannifin announced earlier this year. But this is another debt-fueled bet on the aerospace industry at a time when skepticism is growing about how much longer the multi-year boom in that sector will last. Exotic Metals’s already high Ebitda margin of nearly 30% and compound annual sales growth of more than 16% over the last three years leave little room for improvement. A goal of a high single-digit return on invested capital in year five for the Exotic Metals deal isn’t terribly impressive to begin with; the risk is, even that is optimistic. nVent agreed to buy Eldon, a Spanish provider of electrical enclosures, for $130 million. This is nVent’s first takeover of size since the company was spun off from Pentair Plc in 2018. It’s a good deal for CEO Beth Wozniak to start with: the purchase price is a reasonable 1.4 times the $90 million of sales Eldon generated in 2018 and the business is clearly complementary to nVent’s existing electrical protection systems. Eldon will give nVent more products that adhere to European electrical standards, giving it access to a wider swath of customers, RBC analyst Deane Dray wrote in a report. Eldon is also a bit ahead of the curve on automation and digital initiatives and the deal could help speed nVent’s efforts in those areas. In that respect, the Eldon purchase may serve to make nVent a more well-rounded takeover target in its own right, Dray writes. BONUS READINGRegulators Found High Risk of Emergency After First Boeing MAX Crash Bad Week for Energy Stocks? Wait Till Next Year: Liam Denning Shareholders Voted Them Off the Board, But the Board Said No Helicopter Bankruptcy Highlights Surprise Medical Bill Backlash Ford Acquires Defense Contractor to Get Robot Rides on the RoadAston Martin Is Struggling to Stay on the Road: Chris Hughes(Corrects second paragraph to show that the Gordon Haskett estimate is $500 million, not $500 billion.)To contact the author of this story: Brooke Sutherland at firstname.lastname@example.orgTo contact the editor responsible for this story: Beth Williams at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg Opinion) -- General Electric Co.'s turnaround is advancing to the next stage, but it still has a ways to go.The industrial conglomerate on Wednesday said its chief financial officer Jamie Miller would be stepping down as soon as she transitions her responsibilities to a yet-to-be-identified replacement. Miller was one of the more visible legacies of an era that everyone associated with GE would like to forget. She was named to the CFO job in 2017 by then-CEO John Flannery after the total collapse in GE’s earnings and cash flow expectations made it impossible for former CFO Jeff Bornstein to continue in his role. Flannery was then ousted last year after a series of surprise writedowns added to investor frustrations over a turnaround that seemed to move too slowly.I’ve always felt a bit bad for Flannery; his job was to expose and start to clean up GE’s deep-rooted flaws and there was never going to be any glory in that. But it bothers me that GE put Miller, its first female CFO by my count, into that kind of no-win situation. She wasn't a GE-lifer like Flannery was, but despite the company’s efforts to paint her as an outsider, she’d been with the company since 2008. Not that she didn’t make mistakes: An unfortunate run of forecasts that proved too optimistic did little to endear Miller to investors.Many wondered why Flannery’s successor, Larry Culp, wasn’t doing more to clean house. The most logical explanation is that he needed to maintain some sense of continuity while he got his hands around the problems at GE. In the company’s second quarter earnings, also released on Wednesday, there was some evidence he is doing just that.GE’s struggling power unit posted operating profit of $117 million in the second quarter, down significantly from a year earlier, but up slightly relative to the first quarter and better than some analysts had expected. Fixed costs for its gas turbine operations were down 10% from a year earlier, while orders were up 28%, excluding the impact of M&A and currency swings. After earlier estimating the cash burn in the power unit would worsen from $2.7 billion last year, GE now says there’s a possibility performance may be flat in 2019. That’s after taking into account a reallocation of its grid solutions business to the renewable energy unit, a move which resulted in a $744 million pre-tax goodwill writedown in the quarter.But there were also still remnants of the old GE, the company that turned managing Wall Street expectations into an art form. The company raised its forecast for industrial free cash flow this year, predicting at worst a $1 billion decline versus a previous call for as much as a $2 billion cash burn. GE now says there’s a possibility industrial free cash flow can even be positive for the year, to the tune of $1 billion. Some of that is a reflection of the apparent progress in turning around the power unit. But a fair chunk is tied to lower expectations for restructuring costs this year. GE spent just $382 million pre-tax on restructuring and other items in the second quarter, down nearly 40% from the same period a year ago. It now expects to spend around $1.5 billion on cash restructuring this year, compared with a previous estimate of more than $2 billion.This is a bit weird. Recall that Flannery was pushed out in part because there was a perception that he lacked urgency in fixing GE’s power unit and that much more aggressive cost-cutting would be needed to right that business. GE says the lower estimate is due to a combination of timing, attrition and the execution of projects at a lower cost than projected. But most of the restructuring expense was meant to be weighted toward the second half of the year, per Miller’s guidance, so it’s unclear how GE would have that kind of visibility at this point. Risks to this improved guidance include the grounding of Boeing Co.'s 737 Max. GE, which provides the engine for the Max through its CFM joint venture with Safran SA, said Wednesday the grounding and Boeing's subsequent production cut had shaved $600 million off its cash flow from operating activities in the first six months of the year. The company expects a $400 million hit per quarter in the second half of the year, should the Max stay grounded.More importantly, GE left its wishy-washy forecast for 2020 and 2021 intact, calling for positive industrial free cash flow next year and then further acceleration in 2021. Even with just $1 billion of cash burn in 2019, it’s tough to see how GE exceeds the $4.5 billion of free cash flow it generated last year (itself a depressed level) on an annual basis in that time frame. For what it’s worth, JPMorgan Chase & Co. analyst Steve Tusa is among the most bearish of Wall Street analysts on the company’s 2020 and 2021 free cash flow prospects and he’s been modeling a slightly positive number for this year. GE raising its free cash flow expectations is a win, but it’s worth asking if that forecast was ever really that realistic in the first place or if it was just another way of playing the game of earnings. To contact the author of this story: Brooke Sutherland at firstname.lastname@example.orgTo contact the editor responsible for this story: Beth Williams at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
Singapore's Temasek Holdings posted the smallest rise in its portfolio in three years as key bank stock holdings declined in value, and the state investor said it was increasingly focusing new investments in North America, Europe and on unlisted firms. "Trade and technology tensions are already disrupting supply chains, business confidence is being tested and capital investments have slowed," Png Chin Yee, a senior managing director at Temasek, told a news conference on Tuesday. Temasek's 1.6% portfolio gain for the year to March 31, 2019 came after a 12% increase a year ago and took its net portfolio value to a record S$313 billion ($230 billion).
(Bloomberg Opinion) -- Clouds of worry have been gathering over the commercial aviation industry, but the sun was shining in Paris this week as planemakers and suppliers gathered for the biennial Air Show.I mean that both literally — it was hot — and figuratively, with every executive I talked to adopting the same tone of cautious optimism. They conceded the market is slowing: Amid sputtering air traffic growth, weakening airline profits and a slowing global economy, orders at the Paris Air Show trailed the tally from last year’s Farnborough Air Show on both a unit and dollar basis, according to an analysis by Bloomberg Intelligence’s George Ferguson and Francois Duflot. And the orders that were announced weren’t always written in stone. Vertical Research Partners analyst Rob Stallard counted about 610 commitments for new planes between Boeing Co. and Airbus SE (short of his forecast for 800), but only about 160 of those are firm orders for large aircraft and all of those belong to Airbus.(1) Some orders for Airbus’s new A321XLR — a longer-range version of its top-selling narrow-body jet that was unveiled as expected this week — were converted from existing commitments for previous A320-family models. But there were orders, including a surprise bid from British Airways parent IAG SA for Boeing’s embattled 737 Max jets (more on that later). While everyone no doubt would have preferred a stronger showing, no one was panicking, either.Global growth in demand for commercial aviation is likely to slow to a pace of about 5% this year from around 7.5% to 8% in the past few years, according to the International Air Transport Association. “That’s still a pretty good place to be — look at what many other industries are doing,” Tony Wood, CEO of aircraft braking and fire-protection equipment maker Meggitt Plc, said in an interview. “It’s certainly quicker than the world is growing.” Tim Mahoney, CEO of Honeywell International Inc.’s aerospace unit, pointed out that airlines are filling the capacity they lost when two fatal crashes prompted a global grounding of Boeing’s Max through leases and older aircraft that are staying in service longer than planned. Jet Airways India Ltd. suspended operations in April after running out of cash and is heading to bankruptcy court, but some of its fleet has already been reallocated, Mahoney said. “It’s a validation that the demand from the flying public is there and it continues to grow,” he said. Boeing, meanwhile, now expects the commercial aviation market to need 44,040 new jets and $9.1 trillion of services over the next 20 years. That compares with last year’s prediction of 42,730 jets and $8.8 trillion of services.So, Boeing and Airbus’s backlogs are likely safe in their robustness for the time being. But as I said going into the show, the question is whether they’ve already saturated the market and whether those backlogs will continue to grow. Executives from CFM International, the engine joint venture between General Electric Co. and Safran SA, weren’t super enthusiastic about production rate increases for Airbus’s A320 family. It’s not clear that the supply chain is capable of handling a more aggressive pace, particularly the forging and casting companies, which have been the primary source of delays over the past few years. At a media briefing on Saturday, CFM executives said they also want to be sure any production rate increase is sustainable and will serve the market over the long-term — not just at its peak. The relative dearth of orders at this year’s Air Show would seem to support their cautious stance.ALL’S FAIR IN LOVE AND THE MAXBoeing’s Air Show order tally fell about $10 billion short of Airbus’s haul, but IAG’s commitment to buy 200 Max jets means more for the company than the final total. IAG CEO Willie Walsh, a former 737 pilot, said he would feel comfortable boarding a Max tomorrow. He can’t actually do that because the planes remain grounded globally, but it was a huge vote of confidence when Boeing needed one desperately. That kind of endorsement most likely didn’t come cheap: the list price for the planes IAG intends to buy is $24 billion, but the true price is likely much lower after adjusting for standard discounts and probably a few extra incentives. It’s not a done deal just yet. IAG only signed a letter of intent, which gives it an out in case the Max runs into more problems or if Airbus comes up with a better offer. Airbus sales chief Christian Scherer said his company was never invited to bid on the deal but would very much like to. Either way, IAG’s willingness to back the Max gets Boeing out of the aviation industry’s version of timeout. This was always inevitable. Customers have been resolute in their confidence that Boeing will make the fuel-efficient Max safe to fly again. IAG had previously relied largely on Airbus models for its shorter hauls, so the fact that it’s the one stepping up with a Max order is a testament to airlines’ desire to maintain competition between the two companies. But I do wonder whether that kind of dynamic properly incentivizes Boeing to address the transparency, communication and oversight issues that allowed the Max’s shortcomings to morph into a full-blown crisis. Meanwhile, a good chunk of Airbus’s orders were for the freshly rolled-out XLR, with American Airlines Group Inc. agreeing to buy 20 of the planes and convert existing orders into 30 more. Boeing’s sales chief Ihssane Mounir said in a closing press conference that the XLR addressed only a “sliver” of the middle market and that there’s still an untapped opportunity for a rival offering it’s contemplating. That was backed up by comments from the CEOs of JetBlue Airways Corp. (which ordered 13 XLRs) and Norwegian Air Shuttle ASA (which is thinking about buying the Airbus jet), with both advocating for the range advantages of a possible Boeing new middle-market aircraft. But while Boeing CEO Dennis Muilenburg said there was no plan to accelerate the development of a successor to the 737 model, the Max crisis and advances in manufacturing and engine technology may force it to give that kind of project precedence over a middle-market jet. MEGADEAL SHOWCASEFor all the optimism about continuing growth, I thought it was interesting that Raytheon Co.’s CEO Tom Kennedy and CFO Toby O’Brien chose to cast their company’s merger with United Technologies Corp. as a bet on the long-term value of resiliency. Eventually, the booming growth the aerospace and defense sector have enjoyed simultaneously the past few years is going to come to an end; it’s rare that the two sectors move in tandem. Revenue for the combined United Technologies-Raytheon will split nearly equally between commercial and defense products and between domestic and international markets. “We didn’t have to do this,” O’Brien said. But the combination “makes for a really resilient company through all cycles. If you’re in it for the long haul, why wouldn’t you want that?” Kennedy said he’s not concerned about a slowdown in defense spending in the near-term, given governments’ continuing concerns about geopolitical turmoil. He pointed to backing from both the U.S. House of Representatives and the Senate for more increases in the Defense Department’s budget for research, development, test and evaluation. The deal with United Technologies will help Raytheon compete more aggressively for the next generation of military franchises by giving it new technological capabilities, Kennedy and O’Brien said. The potential for advancements in compact, high-energy power generation, thermal management and hypersonics is intriguing, and the combined company’s $8 billion annual R&D budget will give it an exorbitant amount of money to play with. But revenue synergies are notoriously more fungible than cold hard cost cuts. So the companies’ willingness to share about half of the $1 billion-plus in annual cost savings they’re targeting with the U.S. government may prove the bigger competitive advantage.The synergies number struck analysts as quite low at only about 1% of the combined company’s $74 billion in sales. O’Brien acknowledged the figure is conservative but said the deal was light on integration work because the Raytheon businesses will continue largely as their own units rather than having their contents strewn about between existing United Technologies operations. While that limits the cost savings, it also makes it harder for United Technologies to foul up the deal as it juggles the Raytheon purchase with the continuing integration of Rockwell Collins Inc. and a pending three-way split. With plenty of time and opportunity for something to go wrong here, United Technologies’ wager on scale is relatively untested and GE and Honeywell aren’t so sure that a bigger aerospace and defense company is necessarily going to be a better one. Both argue they have technology advantages that will keep them competitive. But GE again made interesting noises about possible M&A, with aviation head David Joyce noting that he didn’t feel compelled to act by the United Technologies-Raytheon tie-up but “wouldn’t rule out anything.” SOMETHING TO PROVEWith the United Technologies-Raytheon merger looming large and questions mounting about cash flow for GE’s aviation unit, Joyce used the Paris Air Show to strike back at critics. GE Aviation and its CFM engine joint venture tallied $55 billion orders for engines and services at the event. Not all of that was technically new, but the haul was anchored by a legitimately impressive $20 billion order for Leap engines and services from Indian budget carrier IndiGo, which had previously relied exclusively on United Technologies jet engines to power its Airbus A320neo fleet. Joyce also laid out the most in-depth road map for a unit’s free cash flow that I’ve ever seen GE provide. But in what has become an unfortunate pattern for GE, what was probably a well-intentioned attempt at transparency sparked only more questions. Analysts continued to pick apart whether the aviation unit’s $4.2 billion in free cash flow last year reflects the full tax, pension and overhead cost burden it would bear if the business were to stand alone. While GE hasn’t voiced any plans to spin off the aviation unit — and I’m highly doubtful it would be able to do that given continuing challenges in the power and long-term care insurance operations — many investors rely on a sum-of-the-parts analysis to determine the stock’s appropriate valuation. So the legitimacy of that $4.2 billion number as the basis for an independent aviation unit is at the crux of the debate over where the share price goes from here. After walking through the numbers with GE, I feel more comfortable about how they arrived at the $4.2 billion number. But no one knows for sure how all the numbers would shake out if aviation was ever detached from the mothership and the financial benefits inherent in that structure. United Technologies is taking about 18 months to split itself into three parts, and its structure is arguably less difficult to untangle. So I don’t think this debate is going away.QUICK NOTE ON GECASGE’s jet-lessor arm announced a deal to lease 15 additional Boeing 737-800 converted cargo aircraft to Amazon.com Inc., expanding on an earlier agreement to provide the retail giant with five planes. Amazon aims to have 70 aircraft flying on its network by 2021 in just the latest reminder that its logistics aspirations are a real and growing threat to FedEx Corp. and United Parcel Service Inc. In a presentation announcing the latest deal with Amazon, GECAS executives said it costs about $8 million to convert a Boeing 737-800 into a cargo plane. In a separate conversation, Sarah Rhoads, the director of Amazon Air, said the company put out requests for proposals to other lessors and that its ultimate choice had to be cost-effective. She said she felt good about partnering with GECAS. In a meeting with analysts this week, Alec Burger, who heads GECAS, acknowledged that the forecast for the air-cargo market was flat in 2019 amid escalating trade tensions but said the continuing shift to online shopping will continue to support demand in the long term and he’s looking to “modestly grow” the share of the lessor’s portfolio that’s devoted to that market. He said Amazon is not a “must-win account.”DEALS, ACTIVISTS AND CORPORATE GOVERNANCECrane Co. is following through on its threat to take its $45-a-share takeover offer directly to Circor International Inc.’s shareholders. It’s rare to see a true hostile tender offer, so for the M&A nerd in me, this is exciting. Circor’s board said on Monday that it would review the offer and make a recommendation to shareholders within 10 business days. It had previously rebuffed Crane’s offer as opportunistic and said it undervalued the company, a point of view that some shareholders pushed back on, given the choppy — and lately lower — stock price. Mario Gabelli, whose Gamco Investors Inc. is the largest shareholder of Circor, has also criticized the company’s lack of transparency in disclosing Crane’s interest. We are still awaiting the release of a business plan that Circor promised would show a path to greater valuation creation, but Crane’s willingness to go hostile forces Circor into an even tighter corner. Delta Air Lines Inc. bought a 4.3% stake in Hanjin Kal Corp., the largest shareholder in Korean Air Lines Co. Delta and Korean Air have a trans-Pacific joint venture that allows the two carriers to coordinate on flights in Asia and the U.S. Delta expects to boost its stake to 10% over time. The stake purchase is the latest in a string of similar deals with other partners including Brazil’s Gol Linhas Aereas Inteligentes SA and China Eastern Airlines Corp. But the deal also puts Delta in the middle of an activist shareholder’s campaign to push Hanjin Kal to provide more transparency and improve corporate governance. Shares of Hanjin Kal, whose operations also span logistics services, plunged on news of Delta’s investment in an apparent sign that investors see the company’s stake as a roadblock to the activists’ goals. Mitsubishi Heavy Industries Ltd. appears to be moving forward with its interest in acquiring Bombardier Inc.’s CRJ regional jet program. A takeover “would make a lot of sense,” Steve Haro, vice president in charge of global marketing and strategy at Mitsubishi Aircraft Corp., told Bloomberg News at the Paris Air Show. He said news about “new strategic partnerships” would be forthcoming. Recall that Nikkei had reported earlier this month that Mitsubishi wanted to only carve out the aircraft maintenance network of the CRJ program, but Bombardier had insisted on the unit being sold in its entirety.BONUS READING New York Fed Factory Gauge Drops by Record to Two-Year Low Siemens to Cut 2,700 Jobs at Energy Unit Due for Listing Fight for Survival on Doomed Jet Came Down to Two Cockpit Wheels Southwest Pilots to Seek Recovery of 737 Max Costs From Boeing Airbus Says It Must Slash A350 Costs to Win Wide-Body Price War Craft Breweries Are Booming Even as Americans Drink Less BeerIf you’d like to get these weekly industrial insights delivered to your inbox, please email me directly at firstname.lastname@example.org, and ask to join the list. Thanks!(1) Stallard excludes announcements for options or future purchase rights and planes that will be taken throughaircraft lessors.To contact the author of this story: Brooke Sutherland at email@example.comTo contact the editor responsible for this story: Daniel Niemi at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg Opinion) -- Aviation has long been considered General Electric Co.’s crown jewel, but with the company’s free cash flow turning negative this year, “crown jewel” is a relative term and the business is coming under increasing scrutiny. Some of it is deserved; some isn’t.GE Aviation CEO David Joyce seemed to be on a mission at this year’s Paris Air Show to prove his division’s worth. He arrived armed with more financial detail than GE had ever previously provided for the business, came out swinging against suggestions he was sacrificing price to score revenue wins, and announced some notable orders. And yet questions remain about what the business’s true financial profile would be if it was reconstituted as a stand-alone company and cut off from the tax and working-capital benefits that have historically come with being part of the mother ship. That matters, because many investors continue to value GE based on the sum of its parts, the argument being that the aviation unit alone can offset trouble spots in GE’s power, renewables and long-term care insurance operations and support a higher valuation for the stock.First, the positives: GE Aviation and its CFM International engine joint venture with Safran SA booked $55 billion in orders for engines and services at the Air Show, exceeding the $35 billion target Joyce laid out at a media briefing at the start of this week.(2) Like most order tallies from the event, not all of that is technically new business. The number includes an order from AirAsia that had initially been announced in 2016 and entails 200 of GE’s LEAP engines. The purchase was finalized at this year’s event and AirAsia also expanded a servicing agreement, bringing the total value of the deal to $23.1 billion before customary discounts. But there was also a significant new win: Indian budget carrier IndiGo agreed to a $20 billion order for Leap engines, spares and overhaul support.The deal is a blow to United Technologies Corp.’s Pratt & Whitney arm, which had been the sole provider of engines for IndiGo’s Airbus SE A320neo jets. As with Boeing Co.’s face-saving win of an order for its embattled 737 Max jet, some analysts have wondered what GE had to give up in order to convince IndiGo to abandon Pratt. They were encouraged in this thinking by comments from Pratt President Bob Leduc, who said “GE was willing to be more aggressive than we were” on pricing. That may just be Leduc talking his book, though.(4) Unlike in the depressed gas turbine market, where every revenue win likely comes at a cost to GE’s margins, GE shouldn’t need to sacrifice profit to chase market share in aviation – both in general and in the case of this particular deal. Pratt’s GTF engine has had a series of glitches that ultimately proved fixable and relatively minor, but as one of the largest buyers, IndiGo has borne the brunt of the fallout, including in-flight engine shutdowns and grounded planes. Earlier this year, India mandated weekly inspections of certain engine parts and restricted some operations for Airbus planes powered by the GTF. GE has engine headaches of its own. Boeing’s CFO Greg Smith put GE on the hot seat earlier this month, saying its GE9X engine was holding up the aerospace giant’s new 777X plane. At a media briefing this week, Joyce said GE discovered a part of the engine was showing more wear than anticipated and because of the extensive testing required to prove it had fixed the issue, the 777X’s first flight likely won’t happen until the fall. Investors are understandably jittery over any product setbacks after the uncovering of durability issues with GE’s flagship H-class gas turbine. But given the GTF’s history of bugs, I find it hard to fault GE for making tweaks to its engine. In the wake of the voluminous criticism directed at Boeing and the FAA for not realizing the potential impact of a software system linked to the Max’s two fatal crashes, rigorous testing – before the planes start flying – would seem to be in everyone’s best interest.GE has argued it has a technology advantage that will continue to give it an edge even as United Technologies increases its R&D budget through a blockbuster merger with defense contractor Raytheon Co. That remains to be seen, and I don’t think GE’s order wins at the Air Show tilt the scale one way or another. A smart R&D budget is worth more than a big one, but United Technologies will have a lot of money to work with and that will make it difficult for GE and others to stand pat. GE Aviation’s ability to respond to that competition ultimately boils down to how much cash flow it generates – and that’s where confusion continues to reign supreme. At Tuesday’s analyst event, Joyce laid out the various inputs behind the unit’s reported $4.2 billion in free cash flow last year. It was a sign the company is taking investors’ demands for more transparency seriously, although it remains disappointing that these disclosures come in fits and starts. There were some positive takeaways: Citigroup Inc. analyst Andrew Kaplowitz noted the improvement in inventory turns in 2018 even as GE ramped up production of the Leap. But one sticking point was the allocation of corporate costs including pension, interest and taxes, with JPMorgan Chase & Co. analyst Steve Tusa and Gordon Haskett’s John Inch debating whether the unit was carrying its fair share.On the subject of taxes, GE didn't do itself any favors as far as illuminating what's really happening in the aviation unit. The presentation included a line that indicated taxes and other operating expenses deducted $100 million from the aviation unit’s cash flow, which seems quite low on the face of it. But the aviation unit actually pays more than that in taxes. And GE isn't hiding that burden from its calculation of the free cash flow. You just have to know where to look for it.The starting point for GE’s explanation of how it calculated the aviation unit’s free cash flow – $5.8 billion in net earnings after adjusting for depreciation and amortization – had already been adjusted for taxes accrued, based on its operations, according to a company representative. GE confirmed the aviation unit pays a tax rate in the low 20% range that CFO Jamie Miller has guided to for the entire company. The $100 million number for taxes and other operating expenses in the Air Show presentation is something different. That is the difference between taxes paid and accruals in 2018. Are you still with me?The fact that this is all so confusing underscores one of the issues I’ve had with GE’s efforts to be more transparent. Disclosures come in fitfully and often leave people with only more questions. I don’t think GE always does this on purpose; it’s partly a reflection of the fact that this remains an incredibly complex company and any given number is going to require a half-hour explanation. But you can’t have it both ways. Is GE Aviation a crown jewel? Yes. Is GE very good at explaining that? It could use some work in that department. (1) The total doesn't include engines for the 200 737 Max jets that British Airways owner IAG SA ordered at the Air Show. CFM is the sole engine provider for that plane.The list price for those engines is $5.8 billion.(2) The flip side of Leduc's comments was Rolls-Royce Holdings Plc CEO Warren East's description of GE as a "very savvy commercial operator."To contact the author of this story: Brooke Sutherland at email@example.comTo contact the editor responsible for this story: Beth Williams at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- General Electric Co.’s transformation is being led by its aviation business, given the unit’s stability and underlying growth, Citi analyst Andrew Kaplowitz wrote in a note to clients.While the aviation business is not perfect, it does seem to be “operating on all cylinders,” the analyst said. He noted that the company is raising the projected growth for its military segment and continuing to gain share versus its primary competitor with large new orders announced at the Paris Air Show.GE and Safran SA’s joint venture, CFM International, earlier this week also won a $20 billion order for jet engines from Indian carrier IndiGo.“We sense a new energy in aviation and across GE especially regarding cash generation led by CEO Culp,” Kaplowitz added. The analyst maintained the buy rating on GE with a price target of $14.GE is currently undergoing a turnaround process after an unraveling that has wiped out more than 60% of the company’s market value over the past two years, and prompted the diversified manufacturer to divest multiple businesses. While its power turbine business is widely understood to be the most troubled, the aviation unit is often lauded as a competitive, well-run unit.JPMorgan analyst Stephen Tusa, who holds a bearish view on the stock, said the aviation business would have a valuation of about “$60 billion at best,” assuming a 2021 free cash flow yield of about 7%.To contact the reporter on this story: Esha Dey in New York at email@example.comTo contact the editors responsible for this story: Brad Olesen at firstname.lastname@example.org, Jennifer Bissell-Linsk, Steven FrommFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
French aero engine maker Safran outpaced revenue growth plans in the first quarter and stuck to its goals for the year despite the grounding of the Boeing 737 MAX, sending its shares higher on Friday. Safran said its CFM International joint venture with General Electric continues to deliver LEAP engines to Boeing as it catches up on earlier engine production delays, but would adapt its output as necessary. The disclosure suggests Safran is not yet facing a build-up in inventory of engines for narrow-body aircraft, allaying concerns among some analysts about a costly drain on its cash.
France's Safran said underlying revenues grew 12.6 percent in the first quarter as demand for civil aircraft engines, nacelles and military optronics pushed it ahead of the growth needed to meet a steady annual target of 5 percent. Total first-quarter revenues rose to 5.781 billion euros ($6.4 billion) due in part to the acquisitions of Zodiac Aerospace and electromechanical systems of Collins Aerospace. Safran, which co-produces engines for Boeing's recently grounded 737 MAX together General Electric through the CFM International venture, said it continued to build the LEAP engines at the same speed but would cut output if needed.
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Safran SA (EPA:SAF) as an investment opportunity by taking the expected future cash flows and discounting them to their present value...
The U.S. Trade Representative proposed a list of European Union products late on Monday on which to slap tariffs in retaliation to more than $11 billion (£8.4 billion) of EU subsidies to Airbus the World Trade Organization has found cause "adverse effects" to the United States. Piling on the uncertainty, the IMF on Tuesday cut its global economic growth forecasts for 2019, citing a potentially disorderly British exit from the European Union as a key risk. "It's been long accepted that while Europe hasn't been strongly targeted yet, it was going to be the case once China wrapped up, and Europe would be next," said Craig Erlam, senior market analyst at OANDA in London.
European shares slid on Tuesday, with most sectors falling after the United States threatened to slap tariffs on goods from the European Union, with worries compounded by the IMF cutting its global growth forecast. The U.S. Trade Representative proposed a list of European Union products late on Monday on which to slap tariffs in retaliation to more than $11 billion of EU subsidies to Airbus the World Trade Organization has found cause "adverse effects" to the United States.
World is in “Precarious Position” says IMF’s Lagarde You got that right, Christine. The International Monetary Fund, one of the world’s biggest money pits, is worried about the pace of global growth, saying it has lost momentum, which really not a good thing when interest rates are already negative in so much of the western […]The post Market Morning: IMF Frets, Boeing Cuts, Supermassive Blackholes & Bank Earnings appeared first on Market Exclusive.
European stocks were slightly lower Monday morning, as investors prepared for what is expected to be a tough U.S. earnings season.
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European shares had their best day in four weeks on Monday, rebounding from three straight sessions in the red thanks notably to merger chatter in the battered banking sector, which help offset worries over a slowdown in the global economy. London's export-heavy FTSE gradually lost steam, as the pound rose on optimism about the progress of Britain's exit from the European Union ahead of a key vote in Parliament scheduled for Tuesday. German lender Commerzbank was among the biggest gainers on the STOXX 600, up 7.1 percent, after reports at the weekend of a possible tie-up with Deutsche Bank, which also rose 5 percent.
Shares in French aerospace group Safran fell on Monday, which traders attributed to fallout from Sunday's crash of an Ethiopian Airlines 737 MAX 8 plane. Safran is the plane's engine maker. The plane was ...