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GE Slumps as Weak Power Unit Pressures CEO’s Turnaround Plan

July 20, 2018
Slumping demand for gas turbines will continue to weigh on results for some time.

General Electric Co. just can’t seem to escape the drag from the power market.

The shares tumbled after the company said slumping demand for gas turbines will continue to weigh on results for some time. Persistent weakness in its largest unit forced the beleaguered manufacturer to cut expectations for free cash flow this year, even as second-quarter profit came in ahead of Wall Street estimates.

“The biggest challenge we face continues to be working through the turnaround of our power business,” Chief Executive Officer John Flannery said Friday on a conference call with analysts.

The diminished outlook underscores the depth of GE’s troubles and threatens to damp enthusiasm over its efforts to engineer an overhaul. Flannery unveiled his long-awaited plan last month for a far-reaching restructuring, including a narrowed focus, performance improvements and an exit from health-care equipment and oil and gas.

GE dropped 4% to $13.18 at 10:36 a.m. in New York after sliding as much as 4.2% for the biggest intraday decline since May 23.

The Boston-based company said it now anticipates industrial free cash flow this year of $6 billion, the low end of its earlier projection of as much as $7 billion.

The results show “how challenged fundamentals actually are,” Steve Tusa, an analyst at JPMorgan Chase & Co., said in a note to clients.

Volatile Quarter

The second quarter was a volatile one, even by GE’s recent standards. The flagging giant was kicked out of the Dow Jones Industrial Average after more than 100 years, a symbolic blow to one of the stock gauge’s original members. GE also endured its biggest one-day stock decline in nine years after Flannery warned in May that there’s no “quick fix” to what ails the company -- a point underscored again in its latest earnings report.

The CEO, who took the helm from Jeffrey Immelt last year, last month made his boldest step yet to rejuvenate GE, announcing a plan to separate the health-care unit and sell a stake in Baker Hughes. GE also reached agreements in the quarter to merge its century-old locomotive unit with Wabtec Corp. and to sell its industrial gas-engine business to Advent International.

Second-quarter sales fell 19% in GE Power. Flannery has said the market will likely be “soft” for several years.

‘Really Bad’

“Power is still really bad,” said  Karen Ubelhart, an analyst with Bloomberg Intelligence. “When are we going to find the bottom?”

The woes dragged GE’s total adjusted profit down to 19 cents a share in the second quarter, which was still good enough to surpass the 18-cent average of analyst estimates compiled by Bloomberg. Sales rose 3.5 % to $30.1 billion, compared with expectations of $29.4 billion.

The aerospace division, which is ramping up production on a new jet engine, boosted sales 13% in the quarter. Its profit rose, too, but fell short of expectations, according to JPMorgan’s Tusa, who called it “the first miss we have seen here in recent memory.”

By Richard Clough and Eliza Haverstock

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