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GE Raises Outlook as Power Improvement Buoys Culp’s Turnaround

July 31, 2019
With this year’s gain, GE has recovered much of the decline during the early part of CEO Larry Culp’s tenure.

General Electric Co. raised its outlook for the year as the long-suffering power division showed signs of improvement, boosting Chief Executive Officer Larry Culp’s efforts to rejuvenate the ailing manufacturer.

The industrial businesses will generate as much as $1 billion in cash this year, up from the previous range of no more than zero, GE said in a statement Wednesday as it reported second-quarter earnings. The company also boosted its 2019 forecast for adjusted profit by 5 cents a share. In a further break with the past, GE said Chief Financial Officer Jamie Miller will step down soon.

The brighter outlook “is a sign of progress, a sign of stability here, but you’re not going to hear us trying to extrapolate too much too soon,” Culp said in an interview. “To the extent that you saw a lot of negative surprises at the back half of last year and fewer this year, while it’s early and we’re far from perfect, I do think that is a sign.”

The results -- boosted by quarterly earnings above Wall Street’s expectations -- mark the second straight quarter of improved performance under Culp, who set a low bar for himself by slashing the dividend and warning of a weak outlook in power equipment after taking the reins in October. The new CEO has sought to stabilize cash flow and reduce debt to stem one of the worst slumps in the company’s 127-year history.

“Things are turning,” said Nicholas Heymann, an analyst with William Blair & Co. While GE still has more work to do, especially in nursing the power business back to health, the latest moves suggest Culp is “comfortable in his own skin right now. He knows the key levers to pull.”

The shares were little changed at $10.51 at 9:41 a.m. in New York. GE climbed 45% this year through Tuesday, doubling the increase in an Standard & Poor’s index of industrial stocks. With this year’s gain, GE has recovered much of the decline during the early part of Culp’s tenure.

Beating Expectations

GE said Miller would “transition from her role.” The company has started a search for a new CFO and Miller will stay on for now to smooth the changeover.

Adjusted profit fell to 17 cents a share in the second quarter, topping the 12-cent average of analyst estimates compiled by Bloomberg. Free cash flow from the manufacturing units was minus $1 billion, at the high end of GE’s previous expectations.

GE Takes Next Step in Long Road to Recovery: Brooke Sutherland

The results failed to impress Steve Tusa, an analyst at JPMorgan Chase & Co. who earned a reputation for prescience in recent years after emerging as the biggest GE bear on Wall Street. He questioned whether GE’s performance merited the improved outlook for this year, and recommended selling the shares into any gains.

“The stock is up on the headlines, as it has been many times before, but, like in the past, the underlying core fundamentals are actually a bit worse,” he said in a note to clients.

737 Max

Cash flow, a closely watched metric that is considered an indicator of company performance and earnings potential, has been a central weakness during GE’s recent slump. The company had previously said it expected to run through as much as $2 billion this year before a rebound in 2020.

In the second quarter, sales rose 4.8% at GE Aviation while orders fell 10%. The division, a longtime bright spot that has run into hurdles recently, makes engines for Boeing Co.’s 737 Max and 777X, the debut of which is facing delays because of an engine problem.

Culp said GE faces a cash headwind of $400 million a quarter as long as the Max isn’t flying. The Boston-based company makes the engine for the plane -- which has been grounded after a pair of crashes killed 346 people -- through a joint venture with France’s Safran SA.

Revenue at GE Power, which has struggled through a downturn in the gas-turbine market, fell 25%. But the business showed signs of improvement, Culp said, and orders in the gas-power operation climbed 27%.

Adjusted profit this year will be 55 cents to 65 cents a share, up a nickel from the prior range, the company said.

The outlook adjustment was due in part to “improvements at power, lower restructuring and interest, higher earnings and better visibility at the half,” Culp said in the statement.

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