General Electric reports first-quarter earnings before the market opens Tuesday.
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General Electric is at a crossroads. After more than two years as CEO, Larry Culp has done basically everything he set out to do. Now, anxious investors want to know what’s next.
They should get an idea about Culp’s next act when General Electric (ticker: GE) reports first-quarter earnings before the market opens Tuesday.
Wall Street is looking for break-even results from about $17.6 billion in sales, but these earnings don’t matter all that much because of the lingering effects of the pandemic. They’ll probably be far below what the company would produce in a normal quarter.
Cash flow, on the other hand, matters a little more. But the first quarter is seasonally weak. The consensus is that GE burned through about $800 million in the first three month, and GE typically generates most of its cash flow later in the year.
After earnings, cash flow and short-term guidance is taken care of, investors will want to hear more about debt. GE has completely reshaped its balance sheet over the past few years. The aircraft- leasing business, part of GE Capital, is being sold to AerCap (AER). The biopharma business is part of manufacturing giant Danaher (DHR). Even the iconic lighting business is gone—bought by Savant Systems, which designs and makes home automation controls.
All the restructuring leaves GE concentrated around a strong jet engine business, natural gas and renewable power generation and a smaller healthcare franchise focused on capital equipment for doctors and hospitals.
Anything that doesn’t fit into that new core four is likely to go, analysts think. RBC’ Deane Dray told Barron’s that the coal, nuclear and power conversion businesses could be sold. So could GE’s digital-intelligence business Predix, a platform for helping customers track and optimize industrial processes.
As GE sheds more assets it can repay more debt—something investors should applaud. Higher debt than average debt has scared large-capitalization fund managers off GE stock. GE shares are under owned by them, according to Dray.
Additional asset sales, and cutting more debt, would go a long way in restoring portfolio manager confidence. And greater trust in the company would mean more buying by the funds and, in turn, a higher share price.
After investors have a clear line of sight on more debt repayment, they can concentrate on what to pay for GE stock. Using 2021 earnings, however, doesn’t make sense as a starting point for valuation. Commercial aviation remains the company’s biggest business—and commercial aviation was hammered by pandemic. Most aerospace analysts are looking out to 2024 for a normal year and valuating aerospace-related stocks off those numbers.
GE is expected to earn about 90 cents in per-share earnings in 2024. At a market PE ratio, that would work out to a stock price of roughly $20 by some point in mid-2023—remember the market is forward looking. With the stock at about $13.50, shares could gain about 20% a year of the next two years as long as GE removes the debt overhang.
GE stock is up about 25% year to date, better than comparable returns of the S&P 500 and Dow Jones Industrial Average.
Write to Al Root at [email protected]
