GE’s Cash Flow Could Reveal More Than Its Earnings

(Bloomberg) -- When General Electric Co. reports on the first quarter of its “reset year” on Tuesday, the cash flow of the troubled manufacturer will likely attract more attention than its earnings.

After a long and painful unraveling of the company over the past two years, GE is now in a rebuilding mode, a process that Chief Executive Larry Culp said would be a “game of inches.” Accordingly, the profit per share might just be a footnote, with the cash situation expected to reveal the pace and state of the recovery.

“As the dust settles on most of the flagged portfolio moves, and with a stubbornly wide disconnect between adjusted earnings per share and free cash flow, the debate on the stock continues to pivot around what ‘normalized’ free cash flow actually is,” JPMorgan analyst and long-time GE bear, Stephen Tusa, wrote in a note to clients. Tusa, who upgraded the stock to the equivalent of a hold rating in December, reversed his stance earlier this month, and said the significant rally in the shares this year suggested many investors were underestimating the severity of the challenges and underlying risks at GE.

GE shares have gained about 32 percent so far this year, compared to a 17 percent increase in the S&P 500 Index.

While analysts largely expect GE to report a hefty cash burn for the quarter, estimates on the size of the shortfall differ widely. RBC Capital Markets analyst Deane Dray has braced for a cash burn of about $4 billion, while Gordon Haskett’s John Inch said losing that much cash in the first quarter seems “highly doubtful.”

“We believe that magnitude of cash loss could be both highly problematic and poorly received by the bond market and debt ratings agencies,” Inch said. Inch’s first-quarter cash burn estimate stands at $2.4 billion to $2.5 billion.

What Bloomberg Intelligence Says

“GE’s first-quarter results could be upstaged by a status update on the Power unit and the company’s cash flow and liability challenges. Though operating results will remain depressed in the Power segment, progress on restructuring and potential signs of stabilization will be a focus in first-quarter results. Aerospace and Healthcare are likely to post solid organic growth and margins, yet will be overshadowed by dismal results in Power. Cash flow is expected to be negative, as restructuring costs and negative cash flow in Power and Renewables pressure results.”
-- Karen Ubelhart, industrials analyst

Just the numbers

  • 1Q adjusted EPS estimate 9c (range 3c-12c)
  • 1Q revenue estimate $27.07 billion ($26.17b-$28.09b)
  • 1Q cash burn estimate $2.9 billion (2 estimates)
  • FY adjusted EPS estimate 55c (29c-60c)

Data

  • GE has 10 buys, 9 holds, 3 sells; avg PT $11: Bloomberg data
  • Implied 1-day share move following earnings: 7.4%
  • Shares fell after 9 of prior 12 earnings announcements
  • Adjusted EPS beat or met estimates in 8 of past 12 quarters

Timing

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