Imagine if this firm never had brought in Larry Culp as CEO. The man is a power hitter, and the job this guy has done... just wow.
General Electric (GE) released the firm's second quarter financial results on Tuesday morning. For the three month period ended June 30th, GE posted an adjusted EPS of $0.68 (GAAP EPS: $-0.02) on revenue of $16.699B. The firm simply crushed the Wall Street's expectations... by more than $0.20 on the adjusted bottom line print and by about $1.5B on the top line.
That number, by the way, was good for year over year growth of 18.2%. The adjustments made were made primarily for non-operating one-time benefits and gains made on the sales of business interests offset by losses related to discontinued businesses, separation costs and other costs related to the war in eastern Europe.
The Nitty Gritty (Buckle In)
Looking at all of the data can get a bit confusing. For example, for the quarter, the firm posted a GAAP net profit margin of 8.3%, an adjusted net profit margin of 8.8%, and an adjusted organic net profit margin of 9.3%. I say we just go to the Statement of Income. That's my "go-to." As total revenue generation was growing 18.2%, we see that equipment sales grew 27% to $6.688B, and that sales of services increased 13.2% to $9.163B. Lastly, insurance related revenue increased 10.6% to $847M.
The cost of equipment driven revenue popped 25.5% to $6.94B, while the cost of services driven revenue increased just 8.5% to $5.422B. Operating expenses grew 29.8% to $2.358B. In all, costs and expenses wrapped up in one bundle grew 15.4% to $16.001B.
After adding in "other income" which means realized and unrealized gains from the firm's investments in GE Healthcare (GEHC) , AerCap (AER) , and Baker Hughes (BKR) , which swung to a positive $692M from $-1.227B for the year ago comp, and factoring in taxes and interest, earnings from continuing operations end up at $1.054B, up from $-1.127B for the year ago period. This comes to EPS of $0.91. Nice !!
But... Now, we have to add in a loss of $1.019B worth of losses from discontinued operations and $58M worth of preferred dividends paid. This drags net earnings attributable to shareholders down to $-23M, or $-0.02 per share. Still, the vast improvement in this firm's direction and the understandability of its financial statements have improved dramatically since Mr. Culp assumed the leadership role.
- GE Aerospace: Orders grew 37% to $9.451B as revenues grew 28% to $7.86B. Segment profit increased 29% to $1.479B on a profit margin of 18.8%, up from 18.7%.
- Renewable Energy (part of GE Vernova): Orders grew 167% to $8.289B as revenues grew 24% to $3.849B. Segment loss improved from $-419M to $-359M on a profit margin of -9.3%, up from -13.5%.
- Power (part of GE Vernova): Orders grew 7% to $4.348B as revenues contracted 1% to $4.152B. Segment profit increased 18% to $377M on a profit margin of 9.1%, up from 7.6%.
For the full year, GE is raising guidance based upon first half performance and continued second half strength. Organic revenue growth is now seen in the low double digit range up from the high single digit range. Adjusted EPS is seen at $2.10 to $2.30, up from $1.70 to $2.0. Wall Street had been looking for something close to $2.05. Free cash flow is now seen at $4.1B to $4.6B, up from $3.6B to $4.2B.
Additionally, on a segment specific basis, GE Aerospace is seen growing organic revenue in the high teens to 20%, up from the mid to high teens, producing operating profit of $5.6B to $5.9B, up from $5.3B to $5.6B. Free cash flow is expected to grow.
As far as eventual spin-off GE Vernova (which includes Renewable Energy and Power) is concerned, organic revenue growth is seen in the mid-single digits up from the low single digits, producing an operating loss of $-400M to $-100M, up from $-600M to $-200M. Free cash flow is seen flat to slightly improved.
This gets a little messy. For the first six months of the fiscal year, GE has generated cash flow from operating activities of $387M. Out of that, came CapEx of $663M, which appears to leave free cash flow at $-276M. To this number the firm adds separation cash expenditures, corporate restructuring cash expenditures, and taxes related to business sales. Adding all of those "isolated" expenses brings the "adjusted" six month fee cash flow number up to a positive $517M. For the most recent quarter, that number is $415M.
Turning to the balance sheet, or as GE likes to call it, the Statement of Financial Position, the firm ended the period with a cash position of $23.651B and inventories of $16.789B. This brought current assets to $60.213B. Current liabilities add up to $48.108B, including just $1.882B in short-term debt and $17.142B in deferred income. Remember that deferred income is not a true financial liability. That's important.
The firm's current ratio stands at 1.25, which is strong. The firm's quick ratio stands at 0.90, which is not all that bad for a large industry. Now, if we ex-those deferred revenues, which are really goods and services owed, these ratios pop to 1.94 and 1.40, respectively. Simply put, GE's current - under one year - situation is rock solid.
Total assets amount to $163.006B, including $19.299B in goodwill and other intangibles. At less than 12.5% of total assets, I see this as more than acceptable. Total liabilities less equity comes to $130.638B. This does include $19.9B in longer-term debt, which the firm could pay off out of pocket if necessary. The potentially larger issue on the liability side is the $38.673B in insurance and annuity benefits, but overall, this balance sheet is better than decent. When Culp got here, it was a dumpster fire. He deserves a lot of credit.
CEO Larry Culp
The CEO commented on the quarter in the press release: "GE's second-quarter performance was strong, building on our first-quarter momentum and marking a solid first half of the year. Orders and revenue grew double digits, led by robust services growth across our portfolio, increased demand at GE Aerospace and record Renewable Energy orders. Today, we are raising our full-year guidance as market strength and the lean transformation within our more focused businesses drive significant profit and cash improvement across GE."
On segment performance and the coming split of Aerospace from Vernova, Culp added: "GE Aerospace is growing rapidly, executing on the ramp for customers and building services strength, while GE Vernova advances toward its spin-off as Renewable Energy improves and Power continues to deliver. Each business has its own critical mission and focus. We're increasingly operating as GE Aerospace and GE Vernova as we prepare to launch these two independent companies sometime in early 2024."
Performance is improving across the firm. The balance sheet and free cash flow are in places we never expected to see a few years ago. GE Aerospace is likely to be a growth stock, and it may be worth owning GE Vernova as in "own the stock" ahead of the split to ensure one ends up owning the aerospace business, which is where Culp is going to be.
Look at GE Healthcare. That spin-off has outperformed expectations. The stock is already expensive for that reason, trading at 53 times forward looking earnings. This is why I don't want to buy these shares this morning, up more than 4% since last night.
The chart has been simply impressive since breaking out from that double bottom pattern last summer into autumn. The stock has run 140% since last October. I think the uptrend continues for GE even if the market pauses given the coming separation of the aerospace business, which I think can be a juggernaut.
Instead of laying out more than $115 per share (because the dividend is no longer an issue), I would rather go out to September 15th and write (sell) $110 puts for about $1.60. That at least brings net basis if this trader ends up long the shares down to the space in between where the 21 day EMA (exponential moving average) and the 50 day SMA (simple moving average) currently reside. An aggressive trader could also go all the way out to December and sell $100 puts for another $1.60 or so.
Is this risky? Of course it is. So is simply buying the equity. At least this is discounted equity risk over time. One thing the trader can't do is set it and forget it. When one is writing naked puts one must monitor those positions constantly. Falling asleep on positions such as these could be deadly.