General Electric (GE) issues earnings Wednesday for the second quarter of its "reset year," with its aviation unit under closer scrutiny amid Boeing (BA) 737 Max woes. GE stock continues to flirt with a buy point.
GE Earnings Estimates
Estimates: Analysts expect GE earnings to crater 37% to 12 cents a share. Sales are seen falling 4% to $28.87 billion, as General Electric continues to shrink and streamline in what it has called a multiyear transformation.
Results: General Electric earnings results are due Wednesday morning.
GE Free Cash Flow
GE earnings are likely to take a back seat to free cash flow. Wall Street calls for a free cash flow burn at roughly $1.16 billion. GE's industrial businesses burned through $1.2 billion in Q1, much better than expected. Management has guided guiding for industrial free cash flow of zero to negative $2 billion for the full year, with analysts betting on essentially flat cash flow in Q3 and a $2 billion gain in Q4.
The metric is closely watched, especially as investors try to gauge the industrial giant's pace of recovery. A measure of operational efficiency, free cash flow (FCF) refers to money that remains after a company pays for day-to-day and capital expenses.
GE Will Always Have Paris
Analyst Nicholas Heymann of William Blair expects cash use to be less than feared once again, citing record engine orders at the Paris Air Show in June. Of $55 billion in total commitments, he estimates GE Aviation received about $9.9 billion in firm orders. Deposits on those firm orders likely were higher than GE anticipated, boosting cash levels.
General Electric earnings Wednesday could "demonstrate further progress in the company's fundamental turnaround," he wrote July 9.
Others argue GE is "set up to beat" its own Q2 cash guidance, which has been set excessively or inexplicably low.
Those analysts include John Inch of Gordon Haskett and GE bear Stephen Tusa of JPMorgan.
Tusa noted most of the structural cash headwinds, such as restructuring, are weighted to the second half of 2019. Additionally, he pointed out, Q2 "will have an unusually low amount of loss leading equipment deliveries as the Leap (engine) is grounded with the Max, with production likely shifting to highly profitable spare engine sales."
Boeing 737 Max Boost
Aircraft engine manufacturers usually make low profit margins off new engines, which are costly to develop. Aftermarket services and sales, over time, are their source of profits. In the long run, GE Aviation will benefit from the Boeing 737 Max flying again, spurring demand for new GE Leap engines. But the Boeing 737 Max woes offer a short-term cash benefit.
In fact, fellow Boeing supplier United Technologies (UTX) last week signaled gains from the Boeing 737 Max groundings, as older planes must fly more.
Inch sees General Electric using short-term "levers," such as lower capex and restructuring expenditure, to boost short-term flow of cash.
"There are important reasons that quarterly measures such as EPS and organic growth, rather than FCF, are held up as investor standards," Inch said.
Boeing Negatives For GE Earnings
The Boeing issue is likely to play a big part in General Electric's earnings call. This "crown jewel" GE business, which supplies engines for Boeing and Airbus (EADSY) jets, is a major profit driver.
But Boeing has cut production of grounded 737 Max jets and says it could halt output entirely if the jet doesn't return to service soon. GE and its partner Safran supply engines for the Boeing 737 Max.
The airplane maker also warned of potential delays to the maiden flight and deliveries of its new 777X plane, due to a compressor issue in the GE9X engine. GE's latest jet engine, the GE9X, is the world's largest as well as its most powerful.
Both Boeing developments are negative for GE, Inch says.
"(Boeing CEO Dennis) Muilenburg's comments this morning would now suggest that a GE fix for the compressor component is no longer 'in hand' as was suggested by GE on June 18 — begging the question whether the first fix failed, or whether the 'redesign' has proven more complicated than previously anticipated," he wrote July 24.
GE has said it is "working arm in arm with Boeing" on the issue. But investors will want to hear more on the planned engine fixes. They'll also want to see the Boeing issue sized in terms of cash drain.
General Electric CEO Larry Culp has called fixing GE Power his top priority for 2019.
At GE Power, management could address fears of new China-based competition recently raised by rival Siemens (SIEGY). Investors will also want to know if this troubled flagship segment is on track to align capacity with lower demand for large gas turbines.
The unit swung to an $809 million loss in 2018 from a $1.947 billion profit the prior year.
After GE Power, Culp plans to tackle the other major problem area: GE Capital. The financial services division is far smaller than during the 2007-2008 financial crisis, which nearly brought down the company. But General Electric continues to sell off portions of the once-overmighty GE Capital.
Management may choose to address the future of its aircraft leasing business, known as GECAS.
A recent Bloomberg report said that a unit of GECAS (an acronym for GE Capital Aviation Services) has fetched bids for $4 billion from potential suitors. Meanwhile, Heymann thinks GE could move the aircraft-leasing business into the GE Industrial portfolio, as its financial situation improves.
Investors should learn more Wednesday about actions to materially reduce GE's leverage and unfunded pension liabilities by 2020, across both industrial operations and financial services.
GE Stock Near Buy Point
GE stock dipped 1.2% to 10.38 on the stock market today, still close to a 10.82 cup-with-handle entry. Much of that base formed below the 200-day/40-week line, which is not ideal. But GE stock has been above the key level for several weeks.
The relative strength line, which tracks a stock's performance vs. the S&P 500 index, has flattened out for several months after a rally at the start of the year. That follows a huge dive in the RS line from early 2016 and, longer term, the 2001 peak.