General Electric Co. (IW 500/6) surged as its new boss honed plans to cut debt and tackled a thorny overhang from last decade’s subprime mortgage debacle.
GE reached an agreement in principle to settle a Justice Department probe into its defunct subprime-mortgage unit for $1.5 billion, the company said in a statement Thursday as it reported earnings. The move, in line with an earlier reserve, eased investor fears as Chief Executive Officer Larry Culp stepped up efforts to pare the battered manufacturer’s debt load.
“This is clearly moving the right way,” said Nicholas Heymann, an analyst with William Blair & Co. “There are definitely signs of accelerating actions to be able to improve not only GE’s liquidity but, more importantly, plans to reduce GE’s leverage and check off the pending unknowns.”
The latest moves buoy Culp’s efforts to stabilize GE and pull it out of one of the worst slumps in its 127-year history. Since taking the helm in October following the surprise ouster of John Flannery, Culp has announced a restructuring of the beleaguered power-equipment unit, replaced key managers, slashed the dividend and taken steps to separate other businesses into stand-alone operations.
GE jumped 9.6% to $9.98 at 9:40 a.m. in New York after surging as much as 10% for the biggest intraday gain in seven weeks. The shares advanced 20% this year through Wednesday, compared with an 11% gain for a Standard & Poor’s index of industrial companies. GE tumbled 57% last year.
What Bloomberg Intelligence Says
General Electric is squarely focused on reframing its balance sheet into one more capable of supporting its long-term strategic goals, and it’s becoming clearer to the market that the company has the tools necessary to do so. -- Joel Levington, North America industrials credit analyst
Culp pushed back against reports of a possible sale of its jet-leasing business, known as Gecas. Bloomberg reported this month that Apollo Global Management was weighing an offer for the unit, while the Wall Street Journal has also reported on potential suitors.
Keeping Gecas
“We have no plans to sell Gecas,” Culp said on a conference call to discuss earnings.
Investors looked past weak GE performance in the fourth quarter, which Heymann said is “at the outer edges of relevance” until the broader turnaround plan takes shape. Earnings of 17 cents a share in the quarter missed the 22-cent average of analyst estimates compiled by Bloomberg. Sales rose 5.3% to $33.3 billion, narrowly exceeding expectations of $32.3 billion.
A 25% sales drop in GE Power served as a reminder of the depth of the company’s challenges in one of its marquee divisions. The poor performance was expected after a rough 2018, when the business was hit by a market slump, huge writedown and technical troubles with some of its gas turbines.
GE didn’t offer a profit forecast or much forward-looking commentary. Culp said on the call that a “more detailed” outlook will have to wait until the near future.
“The lack of any 2019 guidance is also surprising and suggests uncertainty in the near-term path,” Joe Ritchie, an analyst at Goldman Sachs Group Inc., said in a report. On the other hand, he said, GE’s industrial cash flow was better than expected.
Cutting Debt
The mortgage settlement puts to rest one of the key concerns that has weighed on the shares. But GE is still facing separate investigations into its accounting by the Justice Department and the Securities and Exchange Commission. The company is also contending with a lawsuit from shareholders, elevated debt levels and a slumping power-equipment business.
“Our strategy is clear: deleverage our balance sheet and strengthen our businesses, starting with Power,” Culp said in the statement.
“It’s a start, but we have much more work to do,” he said on the call.
By Richard Clough
