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GE’s Power Unit, Cash May Impress Though Analysts Advise Caution

July 30, 2019
GE shares have risen about 44% so far this year, the eighth-biggest gainer in the S&P Industrials Sector Index.

General Electric Co.’s second-quarter results could spark a rally in the stock on Wednesday, but analysts are still recommending caution.

The process to revive the industrial manufacturer’s troubled power unit, which makes turbines, is expected to show signs of progress.

“As confidence grows that GE Power’s turnaround is likely to be successful and GE’s financial leverage continues to improve, we sense confidence in GE’s outlook should rise,” William Blair analyst Nicholas Heymann wrote in a note. The restructuring of the power businessーamid weakening demand for gas turbines, technical glitches and a shrinking market shareーhad been central to GE’s recovery.

The company may also report that it used less cash in the second quarter, compared with its forecast. GE said in May that it expected a quarterly cash burn of about $1 billion to $2 billion, a level that Gordon Haskett analyst John Inch expects the company to “significantly beat.”

“However, we do not view GE beating its own quarterly free cash flow guidance as an obvious positive fundamental event versus proportionately reflecting the degree to which GE had set the cash expectations bar at an (excessively) low level,” Inch wrote in a note to clients. He interpreted the company’s guidance to be closer to an “internal expectation of $500 million” in cash burn.

Inch’s views were echoed by JPMorgan’s Stephen Tusa, who said that the second quarter will have an “unusually low amount of loss-leading equipment deliveries” as the LEAP engine is grounded along with Boeing’s Max aircraft. That would mean production likely shifted to highly profitable spare engine sales, the analyst said. GE and Safran SA’s joint venture, CFM International, makes the LEAP jet engine.

“A strong book to bill is free cash flow positive, but if it’s because of unsustainably low shipments, it cannot be discounted into future years,” Tusa said.

GE shares have risen about 44% so far this year, the eighth-biggest gainer in the S&P Industrials Sector Index. The stock gained as much as 0.9% in New York on Tuesday ahead of the results.

By Esha Dey

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