Normal Electrical (GE) earnings for the fourth quarter of 2020 are inadequate, however the outlook is brilliant
General Electric shares closed the day nearly 2% on Tuesday after the company reported better-than-expected industrial free cash flow for the fourth quarter and a rosy outlook for the year.
The stock briefly rose more than 10% just before the markets opened on Tuesday, but lost most of those gains over the course of the day.
The company ended the fourth quarter with industrial free cash flow of $ 4.37 billion, a surprise after CEO Larry Culp forecast at least $ 2.5 billion for the last three months of the year. The strong quarter drove the company’s industrial free cash flow positive for the year.
GE also forecast industrial free cash flow of $ 2.5 billion to $ 4.5 billion in 2021.
The company also reported revenue for the fourth quarter ended December 31, which slightly exceeded analysts’ expectations, while its profits fell short of estimates as the industrial giant continued to weather the coronavirus pandemic.
Here are some of the ways GE has performed against Wall Street expectations, based on the average analyst estimates produced by Refinitiv:
- Adjusted EPS: 8 cents compared to 9 cents expected.
- Revenue: $ 21.93 billion versus $ 21.83 billion
The company’s better-than-expected revenue declined 16% year over year for the quarter. Unadjusted, the company reported diluted earnings per share of 27 cents.
“Over the course of 2020, we have significantly improved GE’s profitability and cash performance despite a persistently difficult macroeconomic environment,” Culp said in a statement. “The fourth quarter was a strong free cash flow end to a challenging year that reflected the results of better business operations and strong and improved power and renewables orders.”
The 129-year-old industrial conglomerate makes jet engines, gas turbines, and more, and offers some financial services. The gadgets and lightbulbs it made its name for in the 20th century are no longer in production as the company shrinks and focuses on making a profit.
On a conference call with analysts, Culp said the Covid pandemic “hit us hard” but the company managed to bolster its financial position during the year. He added that the company plans to “play more insults in 2021”.
JPMorgan analyst Steve Tusa, who called GE’s fall years ago, said in a statement to customers Tuesday that the company’s fundamentals were broadly in line with expectations for the quarter, even though free cash flow was surprisingly high.
“The bottom line is that FCF is contributing to the result for the day as usual, but the underlying performance is not too far outside of what we expected,” he said.
Gordon Haskett’s analyst John Inch, who has a hold rating on GE and a target price of $ 7, was not impressed by the increase in cash flow. He told clients that “strong free cash was a hallmark of the recession for almost all industrial companies that freed up working capital due to weak sales.”
The company’s fourth quarter performance was largely driven by an increase in orders in its power and renewable energy businesses, which offset declines in aviation and healthcare. Carolina Dybeck Happe, GE CFO, told analysts that all segments except aviation improved cash flow and “ended the year stronger than it started”.
GE’s power business saw orders up 26% year over year to $ 5.62 billion for the quarter, largely driven by strong gas power plant sales. The company was able to cut fixed costs in its gas power business by 12%, generating positive cash flow for 2020, a year ahead of schedule.
The renewable energy segment posted orders of $ 6.29 billion, up 34% year over year. Revenue in this segment declined approximately 6% year over year to $ 4.44 billion.
Orders in the beleaguered aviation division, which was once the company’s cash cow, fell 41% year over year when the pandemic ruined air travel in 2020. GE stated in its outlook for 2021 that “aviation revenue is expected to remain unchanged year-over-year. This depends on the commercial aviation market accelerating in the second half of 2021 and timing for the delivery of aircraft is increasing. “
The Healthcare segment posted orders of $ 4.98 billion, down approximately 15% year over year. However, GE largely attributed the decline to the sale of its biopharma business in March.
“Over the past year our team has proven to be robust and the momentum in our businesses is growing,” said Culp. “We are in leading positions to seize opportunities related to the energy transition, precision health and the future of flight.”
GE’s financial services division, GE Capital, recorded a net loss of nearly $ 200 million, primarily due to the company’s settlement with the Securities and Exchange Commission of $ 200 million. Without admitting or denying any wrongdoing, the company agreed to pay the fine for allegedly misleading investors by not disclosing accounting changes in its power and insurance departments that made the bottom line look better.
Culp said Tuesday that the range of his 2021 performance will largely be determined by his performance in aviation.
GE was doubly exposed to the air traffic impact of the aviation pandemic, a long-standing gem that manufactures and services aircraft engines, as well as the aircraft leasing unit. The company is betting on an increase in shipments in 2021 as Boeing 737 Max shipments resume. GE and the French company Safran manufacture the aircraft’s engines through their CFM joint venture. The federal supervisory authorities re-released the jets for flight at the end of last year after Boeing made a number of safety-related changes after two fatal accidents and started delivering the aircraft last year.
Efforts to predict the recovery of air traffic, however, have proven to be largely inaccurate. Airline executives have warned over the past few weeks that 2021 is off to a difficult start. Bookings fell from the peak of the vacation at the end of the year, along with an increase in Covid infections and more contagious virus strains that have resulted in new travel restrictions in the UK to the US to South Africa.
Culp warned Tuesday that the whiplash of volatile demand for GE engines and maintenance services had weighed on the supply chain.
“Our supply chain has been on a roller coaster ride,” he said. “We’re working as closely as possible with the supply base to help them do what we do, and that’s short term when we have this volume pressure, but also ready for a number of scenarios to see from a return to more normal volumes. “
The stock has suffered a rift in recent months triggered by a surprise third quarter profit reported in October that sent the stock up more than 70% in the fourth quarter. Positive vaccine news, which bodes well for aviation, has continued to surge.
And some investors are bullish about the turnaround for the company under Culp, especially as he forecasts positive cash flow for 2021. GE continued to repay its debt during the pandemic, cutting costs through layoffs in the aviation business, for example.
CFO Dybeck Happe said the company reduced its headcount by 11% in 2020 and found the company continued to support its finances by selling its stake in Baker Hughes. The company reduced its debt by $ 16 billion in 2020 and ended the year with $ 37 billion in liquidity.
– CNBC’s Leslie Josephs contributed to this report.