GE stock jumps toward long win streak after big profit beat, surprisingly positive FCF

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Shares of General Electric Co. rallied toward an eighth-straight gain Tuesday, after the industrial conglomerate reported second-quarter profit that was more than double what was expected and surprisingly positive free cash flow, with results boosted by an “unpreceded ramp” in the aerospace business.

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The company said it continued to face challenges from supply chain and macro pressures, such as inflation and COVID-19-related issues, but the negative impacts on revenue has eased slightly. The Renewable Energy business continued to disappoint, however, with an unfavorable political environment adding to challenges, which led GE to reduce its full-year free cash flow (FCF) outlook by about $1 billion.

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The stock GE,
ran up 5.4% toward a seven-week high in morning trading, an on track for the biggest one-day gain in a year. A positive close would match the eight-day win streak the stock recorded in February, which was the longest stretch of gains since the 10-day streak ended July 19, 2016.

GE, which is planning to complete a separation into three independent companies by early 2024, reported a second-quarter net loss that narrowed to $857 million, or 78 cents a share, from a loss of $1.19 billion, or $1.08 a share, in the same period a year ago.

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Excluding nonrecurring items, such as a $1.55 billion loss on equity securities and separation costs, GE reported adjusted earnings per share that rose to 78 cents from 22 cents, well above the FactSet EPS consensus of 37 cents.

Total revenue grew 2.2% to $18.65 billion, also well above the FactSet consensus of $17.46, and to mark the first revenue beat in six quarters.

GE said supply chain and macro pressures acted as a five-basis-point (five percentage point) drag on revenue, but that was better than the six-basis-point drag in the first quarter.

The revenue growth was led by the GE Aerospace segment, which saw revenue jump 26.6% to $6.13 billion to beat the FactSet consensus of $5.96 billion amid “robust” customer demand in the commercial engines and commercial services businesses.

“In Aerospace, the industry is experiencing an unprecedented ramp as the pandemic eases, coupled with labor and material shortages,” said Chief Executive Larry Culp on the post-earnings conference call with analysts.

Culp said an additional 20% of its existing engineering team were recently allocated to help solve the shortage issues faster.

GE Healthcare revenue edged up 1.5% to $4.52 billion, as growth in imaging, ultrasound and health care systems services offset supply chain and COVID-19-related shutdowns in China.

For 2022, GE raised its revenue growth guidance for the segment to a “mid-single-digit” percentage range from “low-to-mid-single digit” growth, but said segment profit is now expected to be about $3 billion, or “slightly below” previous guidance due largely to inflation pressure.

GE Power revenue fell 2.2% to $4.20 billion, given some weakness at Gas Power, but beat expectations of $4.20 billion. The company affirmed its 2022 outlook for the segment for revenue growth in the low-single-digit range and $1.0 billion to $1.2 billion in operating profit.

For Renewable Energy, revenue sank 23.5% to $3.10 billion, due in part to lower Onshore Wind North America deliveries resulting from the expiration of the Production Tax Credit (PTC). That missed the FactSet consensus of $3.14 billion.

GE said it “no longer expects a step-up in profit” in 2022 for the Renewable segment, due to additional US onshore demand pressure and as improved pricing wasn’t enough to offset “significant inflation pressure.” The challenges for the segment will likely “push out” about $1 billion of free cash flow into the future.

In summary, CEO Culp said while delivery, price and cost performance are improving, “much is still uncertain” about the external pressures GE is facing. “We continue to trend toward the low end of our 2022 outlook on all metrics except cash, which is lower due to timing of working capital and Renewable Energy-related orders,” Culp said.

In a “quick take” to clients, analyst Saree Boroditsky reiterated the hold rating and $80 stock price target on GE.

“FCF was a positive in the quarter, but the push out of $1bn for the full year was unexpected,” Boroditsky wrote. “The lower outlook for Renewables profitability is unsurprising given recent commentary, but the stronger growth in Healthcare but lower op. profit for the full year was a negative.”

Separately, GE said it spent about $334.2 million to repurchase 4.58 million shares of its stock at an average price of $72.99 during the second quarter.

GE’s stock has dropped 10.6% over the past three months, while the SPDR Industrial Select Sector exchange-traded fund XLI,
has lost 5.8% and S&P 500 index SPX,
has slipped 5.8%.


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