New GE Can't Shake Old Woes as Power Slump Pressures Revamp Plan
(Bloomberg) -- The new General Electric Co. is being dogged by the same old problems.
The beaten-down manufacturer curbed its cash-flow expectations just weeks after unveiling an ambitious revitalization plan as it grapples with persistently sluggish demand for gas turbines. The shares plunged, even as GE revealed second-quarter results that topped 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 around Flannery’s efforts to extricate the company from one of the deepest slumps in its 126-year history. He unveiled his long-awaited overhaul plan last month, calling for a narrowed focus, performance improvements and an exit from health-care equipment and oil and gas.
GE dropped 3.9 percent to $13.19 at 1:35 p.m. in New York, after sliding as much as 5.5 percent for the biggest intraday decline since May 23. The shares fell 21 percent this year through Thursday. Since the end of 2016, GE’s share collapse has wiped out more than $160 billion in shareholder value.
Looking to the end of this year, the Boston-based company said it now anticipates 2018 industrial free cash flow of $6 billion. That’s at the low end of its earlier projection of as much as $7 billion.
The company reaffirmed its annual earnings forecast of $1 to $1.07 a share, though Flannery repeated the company’s suggestion earlier this year that results were trending toward the bottom of the range. Analysts are more pessimistic: They’re predicting 95 cents, according to an average of estimates compiled by Bloomberg prior to Friday’s announcement.
“Investors remain highly skeptical of the company’s ability to meet its full-year commitments,” Deane Dray, an analyst with RBC Capital Markets, said in a note. That’s particularly true after the conference call, in which “management articulated an array of potential shortfalls and risk factors.”
The CEO, who took the helm from Jeffrey Immelt last year, announced plans last month to separate the health-care unit and sell a stake in Baker Hughes -- his boldest steps yet to rejuvenate GE. The company 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.
At the same time, GE had another volatile quarter on the stock market. The company 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.
Second-quarter sales fell 19 percent in GE Power. Flannery has said the market will likely be “soft” for several years. Demand for gas-fired power is flagging globally, in part because of the rising use of renewable-energy sources.
“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 percent to $30.1 billion, compared with a projection of $29.4 billion.
Jamie Miller, GE’s chief financial officer, acknowledged the issues in the power market but said broader results were in line with the company’s expectations. There is “real strength across most of our portfolio,” she said in a telephone interview.
The aviation division, which is ramping up production on a new jet engine, boosted sales 13 percent in the quarter. But even in that division, a pillar of strength during GE’s travails, signs of weakness emerged. The division’s profit margin narrowed in the second quarter, disappointing analysts from banks including RBC and JPMorgan Chase & Co.
In a note, JPMorgan’s Steve Tusa called it “the first miss we have seen here in recent memory.”
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