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 a senior 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.

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Barbara Noverini, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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