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An Old Industrial Giant With A Brand-New Plan Could Deliver Gains

An Old Industrial Giant With A Brand-New Plan Could Deliver Gains

General Electric (NYSE: GE) stock is up after an analyst at Citigroup said the company’s recent warning on industrial free cash flow might mean its 2019 outlook is a bit clearer, even as the bank trimmed its price target on the stock following last week’s sharp sell-off.

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  • The Street noted, according to Citigroup analyst Andrew Kaplowtiz, investors need to remain “keenly focused” on GE’s near-term cash headwinds after CEO, Larry Culp, warned that free cash flow from the conglomerate’s industrial division is likely to remain negative this year.

    Kaplowtiz also said that, despite the group’s admitted challenges in its power division, guidance for organic growth in the “mid-single digits” reflects solid demand and good visibility in its aviation business, steady performance from healthcare and a ramp-up in renewables.

    Kaplowtiz added: “We think that recent actions (including the close of the sale of GE Transportation to Wabtec and the announced agreement to sell GE Healthcare’s BioPharma unit to DHR for $21.4 billion) buy GE some time to execute its turnaround in a deliberate/orderly manner.

    That said, we think that investors remain keenly focused on both GE’s near-term cash headwinds and the underlying cash generation potential of the Industrial businesses once Power is stabilized and broader restructuring actions are implemented.”

    CEO, Larry Culp, told the JP Morgan Aviation, Transportation & Industrials conference in New York that industrial free cash flow will swing from $4.5 billion in 2018 to a negative tally this year as “market pressures impacting volume” as well as “project and execution challenges” impact its struggling power division, according to materials used in the presentation last week

    Culp also said margins in GE healthcare would be like those recorded in 2018, with organic revenue in the low to mid-single digit range.

    JPMorgan analyst Stephen Tusa, commented: “We are no longer willing to engage in a debate where the Bull case is that Power is “not that bad”, the stock can be valued on $1+ (industrial free cash flow), and (GE Capital Services) is merely a zero.”

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  • Culp has vowed that 2019 would be a “year of change” for the struggling group and pledged to focus on both developing GE’s critical power business while reducing debt through asset sales and spin-offs.

    He also said the company’s dividend, which was reduced to just one penny last year amid a series of profit warnings, asset write-downs and broader investor skepticism, allowed GE to retain around $4 billion in cash but would be returned to an industry-competitive level once the balance sheet was stabilized.

    Earlier this year, Culp said, “Simply put, we have too much debt and we need to reduce it thoughtfully and soon. Once we put our balance sheet in a healthier place, we’ll be in a better position to play offense across all our businesses.”

    In only a few months, Culp has raised more than $21 billion through the sale of GE’s biopharma unit to his former company, Danaher Corp., and pledged to shed the group’s healthcare division and reduced its stake in Houston-based oil services group Baker Hughes.

    Things are finally looking up for GE and now could be the time to buy.

    GE daily chart

    GE should be considered a buy if recent momentum continues.

    Look for an entry at $9.99 with a price target of at least $11.70 based on the pattern in the chart.

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