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GE to 'reset' this year, start turning around over the next two years

MarketWatch logo MarketWatch 3/14/2019 Tomi Kilgore
a close up of a sign: General Electric stock falls on J.P. Morgan downgrade© Getty Images General Electric stock falls on J.P. Morgan downgrade

General Electric Co. indicated it will tank this year, with cash flow and its struggling power business the main drags, but looks to starting turning around next year and start winning in 2021.

New York Knicks and New York Giants fans may be able to relate.

GE investors appeared to embrace the company’s approach, as the stock bounced sharply, and extended gains as Chief Executive Larry Culp began speaking on a conference call.

The company said in an investor update that it expects 2019 adjusted earnings per share of 50 to 60 cents, down from 65 cents in 2018, and below the FactSet consensus of 70 cents.

Adjusted Industrial free cash flow (FCF) is projected to be negative $2 billion to flat this year, confirming Chief Executive Larry Culp’s call last week that it would be negative.

“GE’s challenges in 2019 are complex but clear,” Culp said. “We are facing them head on as we execute on our strategic priorities to improve our financial position and strengthen our businesses.”

The stock initially tumbled as much as 4.5% in premarket trade as the GE Outlook presentation became available, then bounced sharply as investors digested the details of the plan. The stock was up 1.3% just before the start of GE’s conference call, with gains increasing to as much as 4.4% as Culp once again pleased investors with his words.

The stock pared some gains after the opening bell, and were up 3.1% in midday trade. Trading volume topped 81 million shares, making the stock the most active on the major U.S. exchanges.

a close up of a map© FactSet, MarketWatch

Don’t miss: GE’s stock rockets to biggest gain in 10 years at CEO Culp embraces reality over hope.

Analyst Jim Corridore at CFRA cut his stock price target to $13 from $15, but kept his rating at buy, as ongoing asset sales should provide enough cash to help de-lever the balance sheet.

“We think GE is making a lot of the right moves, and we applaud the company’s better transparency on issues and plans to resolve them,” Corridore wrote in a note to clients. “While lowered guidance is not a positive, we think GE’s plan and progress show it’s moving in the right direction.”

Also read: GE stock sinks as negative cash flow outlook wipes out gains from biopharma deal.

For GE’s power business, the company guided 2019 FCF to be “down,” or more negative than the negative $2.7 billion in 2018, with 2020 expected to be “significantly better but negative.”

Within power, GE said its gas business is starting to see progress, but it’s still “early in a multi-year journey.” The company is targeting a reduction in base costs of 11% to $3.2 billion in 2019, followed by a further 13% reduction in 2020 to $2.8 billion.

Culp acknowledged that Power has been “under-managed” for the past couple of years, as management was “slow to embrace market realities” and therefore slow to address its cost structure.

The business is in “serious turnaround mode,” Culp said on the conference call. “This is not going to be quick.”

The following shows a summary of GE’s adjusted industrial FCF estimates for this year, next year and in 2021 for each of its businesses:

GE business2018 FCF (negative)2019 FCF forecast (negative)2020 FCF forecast2021 FCF forecast
GE Industrial$4.5 billion($2 billion)-$0Significant improvement, positiveAcceleration
Power($2.7 billion)DownSignificantly better but negativePositive
Aviation$4.2 billionAbout flatFlat to growingUp/accelerating
Renewables$500 millionDown and negativeBetter but still negativePositive
Healthcare$3.0 billionDownUp (excluding BioPharma)Up
BHGE dividend$500 millionBHGE dividend (Expect to decline in line with ownership)N/AN/A
Transportation/Lighting$100 millionM&A exitsM&A exitsM&A exits
Corporate($1.2 billion)DownBetterBetter

Separately, the company said it remains committed to a financial policy that targets a credit rating in the single-A range. That would be one notch above the current BBB+ rating at S&P Global Ratings.

GE’s stock has soared 51.6% over the past three months, but was still down 24.6% over the past 12 months. In comparison, the Dow Jones Industrial Average (DJIA)has gained 6.7% over the past three months and has advanced 3.9% the past year.

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