For the owners of General Electric (NYSE:GE) stock, the news that the company released recently was both very disappointing and very uplifting. All in all, although the recovery of GE and GE stock price will take longer than I previously thought, both still look poised to recover strongly within a year or two.
Source: Shutterstock Since the very disappointing news — including the company’s forecast for negative industrial free cash flow this year and lower than expected earnings per share guidance – has been very well-covered by the media, let’s start by looking at the less-noticed, good news.
The Good News for GE Stock
First and foremost, CEO Larry Culp actually sounded pretty optimistic about the issue that’s caused so many investors to abandon General Electric stock in recent years: the company’s huge debt load.
“If we look at the simple frame here around leverage, I think we’re making a lot of progress relative to the goals that we’ve laid out….There is a lot to do in this regard, a number of things that we’re pretty pleased with in terms of the progress that we’ve made the last several months…We think that combined with what we’ve done and what we will do … really set us up nicely to continue to delever the company.
So Culp said GE is “making a lot of progress” on meeting its goals relative to reducing debt, and he noted that he’s “pretty pleased with…the progress” the company has made on that front. Importantly, Culp added that the company is well-positioned to continue to reduce its debt load.
Those don’t sound like the words of a CEO who’s unsure about his company’s ability to survive. Assuming that Culp, who has a great reputation, isn’t a con artist, I think he’d sound very different if he thought GE and GE stock might go belly up. At the very least, he’d probably say that the company was still studying its alternatives and he wouldn’t have said “we’re making a lot of progress” or “we’re pretty pleased..the progress that we’ve made.”
And when it comes to Power, the company’s largest unit and the other issue that’s caused GE stock price to sink, the CEO sounded like he has a solid plan to turn around the unit and to improve the way it operates.
Culp emphasized the requirement to put customers first in order to avoid fiascoes like the faulty gas turbines that have hurt the unit’s results in recent years. He also mentioned plans to execute better on projects. He discussed the need to cut costs, in order to adjust to lower demand, and to eliminate old, nonrecurring costs associated with “legal obligations” and the acquisition of Alstom.
Also on Culp’s list of priorities for Power are managing the unit on a day-to-day basis and decentralizing decision-making. Finally, he wants the unit’s employees to work hard all year, instead of rushing around at the end of every quarter.
Also in the good news column, I’d argue, is the company’s overall 2019 earnings per share guidance. That came in at 50 cents-60 cents per share of GE stock, versus analysts’ consensus estimate of 65 cents. However, Culp said that the company’s EPS performance would improve after Q1. The company also noted that the top line of its industrial businesses would increase.
Despite the anticipated earnings miss, positive EPS and revenue increases by a company that most believed was rapidly driving toward a cliff is not a bad thing.
The Bad News for GE Stock
Now we move to the much-better-publicized bad news for GE stock. The company said that the free-cash flow of its industrial businesses, excluding certain items, would be zero to -$2 billion this year, while Power’s free-cash flow would decline in 2019. Culp also said that Power’s turnaround would be a”multiyear” process.
All of that was much worse than I expected, given the positive catalysts that I see for Power plus Culp’s statement in November that Power was “getting close” to a bottom.
The Long-Term Outlook for GE Stock Is Still Positive
GE’s 2020 and 2021 guidance was much more upbeat, which indicates that Culp expects the company’s performance to greatly improve over the next two years.
Power’s free-cash flow is expected to significantly improve next year, although it will still be negative. But its free-cash flow is projected to turn positive in 2021. In 2020, the company’s Industrial free-cash flow is projected to meaningfully improve and be positive. And in 2021, the growth of the company’s Industrial free-cash flow is expected to accelerate.
And importantly, the positive catalysts of the Power unit, which accounts for the lion’s share of GE’s revenue and is the main mover of GE stock price, still seem to be intact.
Electric car sales are still ramping quickly around the world. In developed countries, large amounts of data usage should also spark increased electricity usage. Finally, in the U.S. and Canada, more growing of cannabis will also spur new demand for electricity. Cumulatively, these trends should spark more demand for new power plants in many places around the world.
Decreased demand for coal and nuclear plants in many markets has probably hurt Power and GE stock price. But many experts believe that demand for natural gas in the U.S. will continue to rise, although there’s disagreement on whether the increase will be slow or rapid. Nevertheless, in either scenario, GE can still sell many gas turbines and a great deal of equipment for natural gas plants in the years ahead.
Meanwhile, no one seems to question the notion that China’s demand for natural gas will rise rapidly for years to come, while demand for liquid natural gas is increasing all over Asia. Assuming that Culp can light a fire under GE’s employees, Power and GE stock price should be well-positioned to benefit from this demand.
The Bottom Line on General Electric Stock
Culp sounded optimistic about the company’s ability to survive and to thrive by 2021. And it sounds like he has a viable plan to turn the company around.
Although his near-term forecast was disappointing to me and to many owners of GE stock, the company’s long-term outlook and drivers appear to be intact. Therefore, long-term investors should continue to buy General Electric stock at current levels.
As of this writing, Larry Ramer did not own shares of any of the companies mentioned.
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