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GE CEO slow to show results after inheriting a ‘train wreck of a company’: analyst

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Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman break down General Electric’s latest earnings report with John Eade, Argus Research Senior Analyst.

Video Transcript

JULIE HYMAN: And then there is General Electric, and really, cash flow continues to be in focus. That's really the thing that investors watch for General Electric. Industrial cash flow came in ahead of estimates, and the company is predicting industrial free cash flow of two and a half billion to four and a half billion this year. So that, it seems to me, is what's fueling the increase in the shares. John Eade is joining us now to discuss this in more detail. He's Argus Research's senior analyst. John, thank you for being here. So what is GE doing right now that it wasn't before, and this forecast this year does make it seem like there's some sustainability here.

JOHN EADE: So thank you for having me on. GE has been working on this turnaround now for the past two and a half years with the new CEO, Lawrence Culp. He inherited a train wreck of a company that was losing a lot of money, wasn't getting any new orders, couldn't generate any cash, and it is taking him some time to start to show results. But of course, a pandemic and a recession hit in the middle of that turnaround. So now we're three quarters into the pandemic. The company cut a lot of costs in the second half of the year, more than three billion in cash, saving, steps, and it is starting to see orders pick up, right? So those green shoots coming. And as you mentioned, it generated positive free cash flow for the year one year ahead of schedule, generated profits in the fourth quarter, is profitable for the year. So there's some real signs of progress. Still a lot to be done, but good news for GE this morning.

BRIAN SOZZI: John, I'm not even on the earnings report yet. Let's take a step back here. Should investors, the average investor, now seeing GE-- it's our most top traffic ticker right now on Yahoo Finance-- should they avoid GE simply because it's hard to understand their financial results?

JOHN EADE: Well, that has been the case for a long time. And I will say that GE was never as complicated as the old AIG, but one thing that the CEO, Culp, has done is he's simplified the businesses. He's gotten rid of the locomotive business. He sold off oil and gas. He sold off part of the health care business and used that cash to pay down debt. Now, the company has four main growth engines. They've got aerospace, which is a mess right now because of the decline in air traffic and exposure to the Max 37 jet. They've got health care, which is stamping out a lot of ventilators and is doing very well. They've got renewable energy, which is a real Biden idea-- strong order growth in this fourth quarter for wind turbines and offshore turbines. Still not profitable, so some wood to chop at renewable energy, and then they've got power, which has been the long time problem child, but turned profitable in this fourth quarter and is generating revenue growth. So I think the company is a little bit more transparent, and the picture is a little bit clearer going forward.

MYLES UDLAND: You know, John, you referenced some of the divestitures that Larry Culp has made. Do you-- and you outline now there's kind of four clear groups. Do you expect, though, that maybe more streamlining of this core business is possible in the years ahead?

JOHN EADE: It certainly is possible, and remember they almost cut off the entire health care group. And that's been a real crown jewel. I think Larry Culp looked at other areas to save money and was able to keep on health care. And that's been a consistent performer during the pandemic and during the recession. The power business has been the challenge, and they've restructured the power business into like a legacy old group and into a new future group. So I wouldn't be surprised if somewhere down the road they spin off or divest that legacy old power group and focus on what's going to sell in the future.

BRIAN SOZZI: John, the proposals out of the Biden administration-- are they a tailwind or a headwind to General Motors, I mean to General Electric?

JOHN EADE: Well, it's a bit of a mix, right? The focus on clean energy and green energy is very good for General Electric because that's about 25% of their sales, and it's a growing part of their orders and likely their full business. However, higher taxes are probably not a good thing for General Electric, and the fiscal spending, aggressive fiscal spending could raise interest rates. And while GE has paid off a lot of debt over the past couple of years, it is still pretty heavily indebted and would prefer to have rates low. So a bit of a mixed bag for Biden and GE.

BRIAN SOZZI: All right, John Eade, Argus Research senior analyst. Always good to speak with you. Stay safe. We'll talk to you soon.

JOHN EADE: Thank you. Have a good day.