General Electric’s revenues could disappoint. Why Investors Shouldn’t Care
is at a crossroads. After more than two years as CEO, Larry Culp has done virtually everything he planned to do. Now anxious investors want to know what’s next.
They should have an idea of Culp’s next act when
(ticker: GE) reports first quarter results before the market opens on Tuesday.
Wall Street is looking for breakeven results of around $ 17.6 billion in sales, but those profits don’t matter much due to the lingering effects of the pandemic. They are likely to be much lower than the business would produce in a normal quarter.
Cash flow, on the other hand, matters a little more. But the first trimester is seasonally weak. The consensus is that GE spent around $ 800 million in the first three months, and GE typically generates most of its cash flow later in the year.
Once earnings, cash flow, and short-term forecasts are factored in, investors will want to learn more about debt. GE has completely reshaped its balance sheet in recent years. The aircraft rental business, which is part of GE Capital, is sold to
(AER). The biopharmaceutical business is part of the manufacturing giant
(DHR). Even the iconic lighting business is gone – taken over by Savant Systems, which designs and manufactures home automation controls.
The entire restructuring leaves GE focused on a strong jet engine business, production of natural gas and renewable energy, and a smaller healthcare franchise focused on capital goods for doctors and hospitals.
Anything that doesn’t fit into this new core four is likely to disappear, analysts believe. Deane Dray told RBC Barron’s that the conversion activities of coal, nuclear and electricity could be sold. Just like GE’s digital intelligence activities Predix, a platform to help customers monitor and optimize industrial processes.
As GE throws away more assets, it can pay off more debt – something investors should be applauding. Higher-than-average debt has scared large-cap fund managers of GE stocks. The shares of GE are under their ownership, according to Dray.
Additional asset sales and debt reduction would go a long way in restoring the confidence of portfolio managers. And more confidence in the company would mean more fund purchases and, therefore, a higher share price.
Once investors have a clear view on debt repayment, they can focus on what to pay for GE stocks. However, using the 2021 profits does not make sense as a starting point for the assessment. Commercial aviation remains the main activity of the company and commercial aviation has been hit by a pandemic. Most aerospace analysts view 2024 as a normal year and assess aerospace-related stocks based on those numbers.
GE is expected to earn around 90 cents in earnings per share in 2024. At a market PE ratio, that would equate to a share price of around $ 20 by mid-2023 – remember the market is turned to the future. With the stock at around $ 13.50, stocks could gain around 20% per year for the next two years as long as GE removes the debt distress.
GE stock is up about 25% year-to-date, better than comparable returns from the
Dow Jones Industrial Average.
Write to Al Root at [email protected]