General Electric Co. stuck with its 2018 profit forecast, sending shares higher as the beleaguered manufacturer defied Wall Street expectations of a cut.
Strength in aviation and health care is shoring up confidence in the outlook for adjusted earnings of $1 to $1.07 a share, GE said in a statement Friday, just two months after its finance chief said the company was headed toward the low end of the range. Even that would be above the 95-cent average of analyst estimates compiled by Bloomberg.
The results mark “a step forward” in GE’s plan to turn itself around by cutting costs and strengthening the manufacturing operations, Chief Executive Officer John Flannery said in the statement. “Industrial earnings, free cash flow and margins all improved year over year.”
The steady outlook offered a measure of comfort to investors who are reeling from one of the deepest slumps in GE’s 126-year history. Flannery, who took over from Jeffrey Immelt last year, is weighing all options including a breakup as he seeks to turn around the maker of jet engines and power equipment.
GE surged 5.3% to $14.73 ahead of regular trading in New York. The shares fell 20% this year through Thursday, the biggest decline on the Dow Jones Industrial Average. GE was also the worst performer on the stock gauge last year.
The first quarter got off to a rocky start for GE and its shareholders. In January the Boston-based manufacturer disclosed troubles in a portfolio of old insurance policies. About a week later, GE revealed it was under investigation by the U.S. Securities and Exchange Commission over the insurance issue and accounting for unrelated service contracts.
Adjusted profit was 16 cents a share in the first quarter, topping the 12-cent average of analysts’ estimates compiled by Bloomberg. Sales rose 6.6% to $28.7 billion compared with expectations of $27.45 billion.
“Everything seems to check most of the boxes,” said Nicholas Heymann, an analyst at William Blair & Co. Cash usage was good and GE made considerable progress in cutting expenses, he said. “They’ve taken $805 million out of costs and they’re targeting $2 billion this year, so they’re off to a pretty aggressive start.”
GE Sales Change by Division
- Power: -9%
- Renewable Energy: -6.8%
- Oil & Gas: +74%
- Aviation: +6.6%
- Health Care: +9.2%
- Transportation: -11%
- Lighting -1.3%
GE Power was weak, as expected, Heymann said. The operation is facing slumping demand for gas turbines. The health-care unit, on the other hand, “stands out as materially better.”
The company recently announced the $1.05 billion sale of a piece of the health-care business as part of a plan to sell $20 billion of assets. GE said in a presentation Friday that it expects to finalize plans to unload its transportation unit in the second quarter.
GE also confirmed that it plans a disposition of the distributed power business, which includes the Jenbacher and Waukesha gas-engine operations. Bloomberg reported this week that GE was working with investment banks on a sale process, which garnered interest from companies such as Cummins Inc. and CVC Capital Partners.
While GE said a broader review of the portfolio continues, it didn’t provide an update on the plan.
$1.5 Billion Reserve
The company’s finance arm, GE Capital, came under scrutiny during the quarter after GE revealed problems with an old portfolio of long-term care insurance policies. The situation, which led GE to take a significant charge and set aside $15 billion for loss reserves, spooked investors and raised questions about what other liabilities the company would have to deal with.
Flannery said on Friday that GE recorded a $1.5 billion reserve related to a U.S. investigation into GE’s defunct subprime mortgage unit.
By Richard Clough