On Tuesday morning, General Electric (GE) released the firm's third quarter financial results.
GE posted adjusted EPS of $0.35 (GAAP EPS: $-0.14) on revenue of $19.1B. Bottom line performance, even adjusted, fell well short of expectations, while the revenue print did beat Wall Street.
Excluding Renewable Energy higher warranty and related reserves of $500M, adjusted EPS would rise to $0.75. Profit margin came to -0.3%, adjusted profit margin landed at 5.8%, and excluding renewable energy, adjusted profit margin would have printed at 8.5%.
Cash from operating activities hit the tape at $1.3B, while free cash flow showed at $1.2B. Notably, in the press release, Chairman and CEO Larry Culp stated, "Our planned spin-offs remain on track with GE Healthcare ready to go in the first week of January."
Segment Performance
GE Aerospace grew orders 6% to $7.3B and revenue 24% to $6.705B. Segment margin improved to 19.1% from 15.7% as segment profit increased 52% to $1.284B.
GE Healthcare orders printed down small at $4.966B, while growing revenue 6% to $4.613B. Segment margin decreased from 16.2% to 15.4% as segment profit increased 1% to $712M.
Renewable Energy experienced a 43% decrease in orders to $3.727B, as revenue fell 15% to $3.594B. Segment margin fell from -3.6% to -26%, as segment losses ballooned from $-151M to $-934M.
Power grew orders 14% to $4.182B, as revenue decreased 12% to $3.529B. Segment margin dropped from 5.1% to 4% as segment profit decreased from $204M to $141M.
Balance Sheet
GE ended the quarter with a net cash position of $18.893B, and inventories of $17.536B. Current assets totaled $60.082B, which is down more than $6B from the start of the year. Current liabilities, including $4.285B in short-term debt, amount to $54.657B. This leaves GE's current ratio at 1.1, which is nearly in-line with the 1.13 print from three months ago. Sans inventories, the firm's quick ratio hits the tape at 0.78 down small from 0.8 three months back.
Total assets add up to $180.877B including $33B in "goodwill" and other intangibles. At 18% of total assets, this is not outlandish in the least. Total liabilities less equity come to $148.124B. This includes $26.121B in long-term debt. I would like to see either more cash on hand or a reduced debt-load. That said, this balance sheet, though not a work of beauty, does pass the smell test. The balance sheet is not a problem.
Outlook
For the full year, GE sees adjusted organic margin expansion of 125 to 150 basis points, down from 150+ back on the firm's Investor Day on May 10th. The firm now sees full year adjusted EPS of $2.40 to $2.80, down from $2.80 to $3.50 in May, and probably most important right now... GE sees full-year free cash flow of about $4.5B. That's down from $5.5B to $6.5B in May, but the firm did let us know along the way that about $1B in FCF had been pushed out toward a later date.
My Thoughts
I don't love these earnings. Renewable Energy appears to be a train wreck. Aerospace, to me, seems to be the only completely healthy segment. Margin is going the wrong way for both GE Healthcare and at GE Power.
That said, I can see the attraction of the coming three way split for investors. GE Healthcare is self explanatory and should be a sustainable business. Will it grow? I don't know. GE Aerospace will be the crown jewel of the three. That will probably be a desirable stock to own. Then there will be GE Verona, which will be the combination of the renewable energy and power business as well as the firm's digital properties. That last one might turn out well, someday, but possibly not that soon.
GE opened Tuesday morning above a descending trend line that has been in place for about a year without being violated. Since mid-October, GE has taken back its 21 day EMA and 50 day EMA. Now, the shares will be asked to hold onto a breakout beyond that trend-line and then tackle the 200 day SMA at $79. Seems like a lot to ask just because the company is splitting up and free cash flow projections were down, but not down that much.
Instead of chasing the stock today after an earnings report that did not knock anyone's socks off, and given that the stock has touched its 50 day SMA three times since the start of September, my plan if I wanted to be long this stock by years end, would be to sell equity risk at that line over time rather than straight up pay for an equity stake.
The GE December 16th $70 puts went out at $3 on Monday night and the December 16th $65 outs went out at $1.55. Given one's appetite for risk, my guess is that an investor could possibly sell one of these and still end up long the shares... or at least get paid for doing nothing.
