General Electric (NYSE:GE) reported a 6% drop in earnings while FCF slumped. But the higher guidance is a pleasant development. Although the stock will not move by much in the near-term, the transformation is progressing in the right direction.
GE reported FCF of negative $1 billion in the second quarter. This is better than guidance. Organic orders rose 4% and industrial segment organic orders grew 7%. The backlog of $396 billion is up 11% Y/Y. The Power unit is showing signs of stabilizing and is certainly better than the 1H outlook.
In 2H/2019, GE will continue to align costs at the Power division with the market reality. Renewables will benefit from the volume ramp, such as the launch of Cypress & Haliade-X. De-levering the balance sheet to 2.5x in the Industrial net debt/EBITDA and 4x for GE Capital debt/equity is GE’s priority.
The CFO’s resignation announcement is a concern but CEO Lawrence Culp is cleaning up the management team. He needs new staff that will give him and investors better quarterly guidance.
Headwinds
The grounding of Boeing’s (NYSE:BA) 737 MAX jetliner could lead to $1.4 billion in costs for GE. This is a temporary setback which will tie Boeing’s rebound with that of GE’s. Expect GE stock drifting in the $9 - $10.50 range in the near-term with prospects improving within a few quarters.
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