If you listen to corporate earnings calls, you might have gleaned that they are tightly scripted affairs. A mega-cap company such as General Electric (GE) will have a small army of investor relations folks and corporate lawyers go over the script repeatedly before the call. If I were working for GE, these would be my key bullet points for tomorrow's earnings call:
We are lowering guidance for 2018 EPS. This has to be the first point. In its fourth-quarter call GE management guided the Street to a range of $1.00-$1.07 in earnings per share for 2018. As the year has progressed, analyst estimates have been lowered outside that range. Current consensus is $0.96 and Friday GE needs to find a range that it can actually hit. Look for a range that centers near $0.90 per share. Really it is long past the time that this company should get back to Jack Welch's mantra of "underpromise and overdeliver."
Power is stabilizing, albeit at much reduced levels of revenue and profitability. In the first quarter of 2017, GE Power posted revenues of $6.089 billion and an operating profit of $797 billion. I look for revenues to be down at least 10% year-on-year in the first quarter of 2018 and I would be surprised if that division managed to eke out of profit in the first three months. What's important, though, is the order book, and the fourth quarter's 24% y-o-y decline in orders at Power spooked the Street. I don't expect that figure to be positive in tomorrow's presentation, but look for GE to place a positive spin on its most hated business by singling out turbine orders from one or two big customers. The bar is so low for Power that it won't take much to cheer analysts.
Baker Hughes GE is outperforming its peers and is incredibly well-positioned in a world of $70/bbl oil. It is time for GE to attack the naysayers who keep writing that Jeffrey Immelt killed the company by betting on fossil fuels. That is demonstrably false, and with activity at a frenzied pace in places like the Permian Basin in Texas, GE needs to remind the Street that its 62.5% stake in Baker Hughes (BHGE) is a very attractive and salable asset. Orders rose 81% in the fourth quarter and I'd like to see at least 100% growth in GE's Oil and Gas orders in first quarter 2018.
We won't generate free cash flow in 2018, but we are confident that GE will be cash flow positive in 2019. The other part of GE's guidance was for free cash flow of $6 billion-$7 billion in 2018, but that figure excludes pension contributions which CFO Jamie Miller has pegged at $6 billion. So, really, the Street has pegged GE's true 2018 FCF at zero. Again, management needs to be realistic and accede to those forecasts while delineating a business unit-by-business unit plan to produce positive cash flow in 2019.
We are writing GE capital's value down to zero. This is essentially the value the Street is placing on that business, and Bank of America Merrill Lynch's analysts stated explicitly last week that they believe the unit has "zero equity value." So, CEO John Flannery, Miller and company need to make GE's balance sheet reflect that reality, and move on from the legacy issues that plague GEC.
We are NOT selling Aviation or Healthcare, and in fact will be growing those business units through bolt-on acquisitions. That's the curve ball the Street needs to see. Instead of selling its high-performing business, GE will grow them while limiting divestitures to any/all of GE Capital and out-of-favor business like Transportation and Renewables. As it should do with Baker Hughes, GE management needs to trumpet the strength in its core business units which has recently been overshadowed by all the noise that surrounds GE Capital and Power.
So, that's my bottom line, I want to hear John Flannery go on the offensive tomorrow, and an aggressive outlook would help GE shares maintain the nascent recovery they have undergone this week. If he talks up GE's strengths, the shares could easily hit $15 by the end of trading Friday. That would still leave a lot of room for recovery, but every script-writer knows that the first step is always the most important one.