Industrials

GE Outlines Cash Burn From Boeing Max and Insurance Woes at Investor Conference

Jon C. Ogg

Published: February 19, 2020 11:25 am

The ongoing saga of delays at Boeing Co. (NYSE: BA) and the aftermath of the deadly Boeing 737 Max crashes has come with a widespread fallout in multiple companies that deal with Boeing. There is still no official relaunch date that airlines will be able to start flying the 737 Max planes again, and Boeing was so loaded up on recently built planes that were still grounded that Boeing finally had to suspend production of that plane. As General Electric Co. (NYSE: GE) is a jet engine supplier to Boeing, this is acting as a drag at GE and hurting its own recovery efforts.

At a Barclays industrial investing conference in Florida, GE CEO Larry Culp outlined some of the key issues affecting GE as 2020 is underway. The presentation had some negative points, and the flash headlines might have looked more alarming, but overall it had a more upbeat tone around growing margins and longer-term cash flows, and that sent GE shares higher on Wednesday morning.

24/7 Wall St. listened to the presentation and the questions and answers, but most of these references are contextual rather than direct quotes as no written statements were (as of yet) made by GE to confirm what was directly said in Culp’s comments.

Culp warned that GE would burn around $2 billion in cash flow during the first quarter. The extended 737 Max grounding and production halt were cited. Culp had not provided a cash flow target for the first quarter along with last month’s earnings report. As such, earnings are currently projected to be lower in the first quarter of 2020 than the first quarter of 2019.

A quick look at the Refinitiv consensus estimates showed that the March quarter estimate of $0.13 in earnings per share (EPS) compared with an actual $0.12 EPS in the first quarter of 2019.

Culp currently expects $2 billion to $4 billion in free cash in 2020, after selling its biopharma and Baker Hughes. Culp also noted that GE is typically a better cash flow story for the second half of the year. This was evidenced by roughly −$1.2 billion in the first quarter of 2019 still coming back up to positive cash flow of $2.3 billion from industrial operations for all of 2019.

Culp noted that GE will work through legacy and that GE Power will do better but still be negative in 2020. It sees a better than expected order book in gas power with better margins, and that power unit had been a problem in the past.

Insurance remains a drag on GE, but less of one than expected. Culp’s reference was that “Insurance is something none of us would have signed up for…” but the firm sees only about $100 million in true-up charges in the first quarter of 2020. In debt and pensions, Culp noted that there are some ways to benefit the shareholders.

While these were just some of the notes from GE’s presentation at the Barclays Industrial Select Conference 2020 on Wednesday, Merrill Lynch’s Andrew Obin upgraded GE to Buy on the heels of the last earnings report. His cash flow target for 2020 was $3.7 billion, excluding the biopharma operations that are coming out of GE this quarter.

Back with GE’s earnings report at the end of January, the 2020 outlook of $0.55 EPS for 2020 was under a $0.67 EPS consensus at the time, and cash flow for the year was projected to around $3 billion for GE’s industrial operations that were dependent upon the 737 Max returning to service.

As noted above, the overall positive tone to the presentation seems to have overcome what first appeared to be negative headlines about GE’s first quarter of 2020. GE shares were last seen up 1.4% at $12.92, and GE’s post-earnings reaction on January 20 had taken the stock from $11.73 to $12.94. GE’s most recent high was $13.26, seen on February 12, but the $13.16 closing price on that trading day has been the only day since October of 2018 that the stock closed above $13.

GE’s 52-week trading range is $7.65 to $13.26, and its market cap is back up to $112 billion.