We see recent weakness in the firm’s shares as more symptomatic of near-term uncertainty rather than deterioration in GE’s longer-term prospects.
By Barbara Noverini, CFA | 07-21-17 | 01:33 PM | Email Article

Industrial free cash flow turned positive in  GE’s second quarter at over $700 million, a welcome result following the negative $2.2 billion reported in the first quarter. However, management’s increasingly cautious tone regarding resource-rich markets in the Power segment, ongoing weakness in the Oil and Gas segment, and a possible delay in closing the Industrial Solutions sale all contribute to the swirl of near-term negativity that we’ve seen overhanging the stock. 

Barbara Noverini is an equity analyst for Morningstar.

Management reiterated its $12 billion to $14 billion target in industrial cash from operations for 2017. Meeting the low end of this range will require GE to generate approximately $1 billion more in industrial CFOA than it did in second-half 2016. With GE’s cash generation typically back-half loaded, we still believe the guided range is achievable; however, persistent weakness in energy-related segments could make this an uphill battle.

We intend to trim our near-term earnings and cash flow estimates to the low end of management’s guidance; however, we do not expect this to materially impact our fair value estimate. We see recent weakness in shares as more symptomatic of near-term uncertainty rather than deterioration in GE’s longer-term prospects.

Although GE’s consolidated top line declined 12% year over year on a reported basis, industrial sales increased 2% when excluding the impact of divestitures. Power, Renewables, Healthcare, and Energy Connections and Lighting each grew revenue organically year over year by 5%, 13%, 5%, and 2%, respectively. This more than offset ongoing weakness in Oil and Gas and Transportation, which reported organic sales declines of 3% and 13%, respectively. Industrial operating margin increased year over year by 10 basis points to 13.2%, contributing to over 70 basis points of year-to-date improvement in margins, only 30 basis points shy of its 100 basis points year-end 2017 target. We continue to believe incremental improvement is happening at GE.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Securities mentioned in this article

Ticker

Price($)

Change(%)
Morningstar Rating Morningstar Analyst Report
With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Barbara Noverini, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
Sponsored Links
Sponsor Center
Content Partners