The turnaround timeline at General Electric (GE) under new CEO Larry Culp just got a bit longer.
Shares of the Boston-based industrial company were extending losses on Wednesday morning after marking a 4.72% drop on Tuesday. The steep slide has erased a good deal of the gains and good will that Culp garnered since the stock's December trough.
Surprise comments by Culp at the JP Morgan Aviation, Transportation & Industrials conference on Tuesday, indicating industrial free cash flow will be increasingly negative in 2019, are the key reasons for the slide.
"This is not a business I think any of us would say we have run to the best of our abilities the last couple of years," Culp told JP Morgan analyst Stephen Tusa. "This is a business, as you may recall, we mentioned this on the fourth quarter earnings release, that lost a lot of money last year, to the tune of $2.7 billion. We're going to continue to see negative -- or I should say, in terms of negative free cash, we're going to see that continue in 2019. In fact, we think we'll see even a greater level of negative free cash in Power in this year as we work through these issues."
Tusa quickly pushed for more clarity in a question and answer session with Culp.
Charles Stephen Tusa - JP Morgan Chase & Co, Research Division - MD
When you said negative on the free cash flow front, you just meant down year-over-year? Or you meant negative income?
Lawrence Culp - General Electric Company - Chairman & CEO
Negative. As in the end-year free cash flow in 2019 will be negative, will be in negative territory.
And how do you define that?
Free cash flow?
Yes. Define free cash flow. Is that industrial free cash flow? Does that include GE Capital contributions? Does it include.
I'm sorry, industrial free cash flow will be in negative territory...
Total industrial free cash flow will be negative.
Tusa, one of the more bearish analysts on the stock in recent years, said that after the Q&A his paltry $6 price target "looks generous".
"We are no longer willing to engage in a debate where the Bull case is that Power is 'not that bad'," Tusa said in a note on Wednesday. "We are willing to consider that zero industrial free cash flow is not a sustainable level, but the stock is not reflecting that as a run rate with an $85 billion market cap. The answer to us is somewhere in between where the stock is today and zero and that is where generally our price target sits."
He added that Culp's projections leave the timeline for any tangible turnaround at least a few years down the road, breaking with typical company commentary.
"Unlike prior episodes that were based on next year, this seems to stretch into 2021, a whole new level," Tusa wrote. "As long as this sentiment prevails, we don't think the stock can bottom."
The persistence of cash issues is amplified at GE given its hulking debt and credit profile that sits only two notches above junk at Moody's.
Gordon Haskett's John Inch on $GE:
"Actual FCF was $0 in 2018 (after dividends), will be substantially negative in 2019 (per co.) & possibly still negative in 2020 (per our calculations). Consequently, we believe the risk of additional debt ratings downgrades has now increased."— Morgan Brennan (@MorganLBrennan) March 5, 2019
The grim outlook does not bode well for Culp as he prepares for his first outlook call on March 14.
To be sure, some analysts were not surprised and suggested that conservatism will be the hallmark of Culp's new belt-tightening leadership style.
The reaction to the deep dividend cut in December is a good indicator, as the stock rallied over 50% after the move. Culp will be tasked with placing a new floor in about one week's time.
"The expectation is that this call will provide plenty of new disclosures on the company's 2019 assumptions, portfolio breakup, de-leveraging of the balance sheet, long-term care insurance liability, and turnaround of GE Power," RBC Capital Markets analyst Deane Dray said on Wednesday. "We also believe that there is a meaningful contingent of investors that have been patiently waiting on the sidelines for more clarity on GE's outlook before stepping into the stock."
Dray retained an "Outperform" rating and $12 price target, twice that of Tusa, on the belief that Culp can accomplish the tall order and entice those sideline sitters into the stock.
For now, the lack of clarity on the outlook, the lengthened timeline for recovery, and the expectation of greater pain in the industrial segment are leaving few market participants so optimistic.