GE Jumps as Investors Laud CEO's Progress in Exiting `Abyss'

(Bloomberg) -- General Electric Co. is having a good earnings day. Yes, you read that right.

The beleaguered manufacturer reported solid results, reaffirmed its profit forecast and avoided the kind of nasty surprises that marred earnings in recent quarters. Chief Executive Officer John Flannery expressed optimism that GE would exceed its $2 billion cost-cutting goal and said he’s exploring new ways to run the company.

“I’m excited about the path we’re on,” Flannery said Friday on a conference call with analysts to discuss GE’s earnings. “Today is our first report card for 2018 and we see signs of progress.”

GE Jumps as Investors Laud CEO's Progress in Exiting `Abyss'

The steady outlook cheered investors, who have been reeling as GE stumbles through one the deepest slumps in its 126-year history. The latest results suggest the maker of jet engines and gas turbines is taking “baby steps out of the abyss,” said Scott Davis, an analyst at Melius Research.

“After eight months on the job, CEO Flannery seems to be getting his arms around GE,” Davis said in a note to clients. “It’s the first time that GE spoke in more detail about fixing the GE culture -- a re-focus on lean manufacturing and compensating employees for the quality of a result (i.e. cash flow) and how it flows through” to overall earnings.

The Boston-based company is also in talks to sell its century-old locomotive business to rail-equipment maker Wabtec Corp., people familiar with the matter said, in an indication that Flannery is pushing ahead with asset sales. The transportation unit could be worth as much as $6.8 billion in a sale, Julian Mitchell, an analyst at Barclays Plc, wrote in a note to clients on April 17.

GE jumped 5.2 percent to $14.72 at 1:52 p.m. in New York, after surging as much as 7.6 percent for the biggest intraday advance since April 2015. It was the only stock in the Dow Jones Industrial Average to log better than a 1 percent gain. GE posted the biggest drop on the stock gauge this year through Thursday, repeating its cellar-dwelling performance from 2017.

‘Green Shoots’

Flannery said he sees “green shoots” at GE, reprising former Federal Reserve Chairman Ben Bernanke’s phrase as the U.S. was emerging from the severe recession in 2009. Looking to the longer term, Flannery said he summoned top leaders to the company’s leadership institute in Crotonville, New York, to discuss “a new GE operating system.”

The revamped structure will give individual business units more autonomy, he said. Corporate operations, meanwhile, will narrow focus on “strategy, governance, capital allocation and talent.” The broad review of GE’s portfolio remains under way, he said.

The first quarter got off to a rocky start for GE and its shareholders. In January the manufacturer disclosed troubles in a portfolio of old insurance policies. About a week later, GE revealed it was under investigation by the U.S. Securities and Exchange Commission over the insurance issue and accounting for unrelated service contracts.

But the results exceeded expectations. Adjusted profit was 16 cents a share in the quarter, topping the 12-cent average of analysts’ estimates compiled by Bloomberg. Sales rose 6.6 percent to $28.7 billion compared with expectations of $27.45 billion.

‘Aggressive Start’

Strength in aviation and health care is shoring up confidence in the outlook for adjusted earnings of $1 to $1.07 a share, GE said in a statement, just two months after its finance chief said the company was headed toward the low end of the range. Even that would be above the 95-cent average of analyst estimates compiled by Bloomberg.

“Everything seems to check most of the boxes,” said Nicholas Heymann, an analyst at William Blair & Co. who recommends buying the shares. Cash usage was good and GE made considerable progress in cutting expenses, he said. “They’ve taken $805 million out of costs and they’re targeting $2 billion this year, so they’re off to a pretty aggressive start.”

GE Sales Change by Division
  • Power: -9%
  • Renewable Energy: -6.8%
  • Oil & Gas: +74%
  • Aviation: +6.6%
  • Health Care: +9.2%
  • Transportation: -11%
  • Lighting -1.3%

GE still has tall hurdles to overcome. In particular, its huge power-equipment business remains weak, as demand shifts away from the company’s signature gas turbines. The company had expected an overall market of 30 gigawatts to 34 gigawatts for such equipment this year, Chief Financial Officer Jamie Miller said. Instead demand is trending to less than 30 gigawatts.

Skeptics of GE’s turnaround are likely to focus “on tepid industrial free cash flow to start the year, as well as a power market that is trending below GE’s expectations,” Joe Ritchie, an analyst at Goldman Sachs Group Inc. who has a neutral rating on the shares, said in a report.

Steve Tusa, an analyst at JPMorgan Chase & Co., said the quarter “was not a disaster” but offered scant reason to think there’s significant room for more stock gains.

“Bottom line, unlike the past several quarters that were undeniably weak, this has something for everyone so there will be more debate,” said Tusa, who recommends selling the shares. “But we don’t see a turn in fundamentals as supporting upside.”

Asset Sales

GE recently announced the $1.05 billion sale of a piece of the health-care business as part of a plan to sell $20 billion of assets. GE said in a presentation Friday that it expects to finalize plans to unload its transportation unit in the second quarter.

GE also confirmed that it plans a disposition of the distributed power business, which includes the Jenbacher and Waukesha gas-engine operations. Bloomberg reported this week that GE was working with investment banks on a sale process, which garnered interest from companies such as Cummins Inc. and CVC Capital Partners.

The company’s finance arm, GE Capital, came under scrutiny during the quarter after GE revealed problems with an old portfolio of long-term care insurance policies. The situation, which led GE to take a significant charge and set aside $15 billion for loss reserves, spooked investors and raised questions about what other liabilities the company would have to deal with.

Flannery said on Friday that GE recorded a $1.5 billion reserve related to a U.S. investigation into GE’s defunct subprime mortgage unit.

©2018 Bloomberg L.P.