General Electric Company (NYSE:GE) stock has come under pressure due to falling revenues and declining cash flows.
The industrial giant General Electric Company (NYSE:GE) is set to report its Q2 2017 earnings on Friday, this week. This will be the first earnings report the company will be presenting since the announcement of the impending change at the helm. GE's current CEO, Jeff Immelt will be stepping down as CEO of the company after being at the top post for past 16 years. Immelt will be succeeded by John Flannery. Investors will be looking for any sign of strategic changes in managements objectives and directions. Flannery has promised a comprehensive review of GE's businesses.
GE stock has underperformed the market.
Under, Immelt's leadership, GE had embarked upon a mammoth restructuring of its business by divesting its finance business and returning to its industrial roots. While GE has taken significant steps in that direction, things have not gone according to the script. Its growth has come under pressure and shares have underperformed the wider market. GE stock is down more than 15% this year, compared to around 10% return by S&P 500 in the same period. S&P 500 has outperformed GE stock over the 5-year and 10-years period as well. GE is the second-worst performer on the Dow so far in 2017.
Cash flows have come under pressure.
In the past one year, GE stock has come under pressure due to the miss on revenue estimates and its declining free cash flow. FCF has declined from $20 billion in 2014 to $12.6 billion in 2015 and -$7.4 billion last year. This is a huge decline, especially for a company which is spending billions of dollars on stock buy backs and dividend payments. While a significant return of capital is driven by proceeds from divestitures, organic cash flow will remain crucial if the company wishes to sustain its capital return policies. Last year the company had spent more than $8.8 billion in dividend pay outs and $21.4 billion in stock buy backs. In the first quarter of this year, dividend payments came in at around $2.08 billion.
GE still has over $80 billion in cash and marketable securities on its books, which gives it enough leg room to continue its capital return policy. However, investors will be keenly watching its cash flow numbers, especially industrial cash flow from operations. In the first quarter, industrial cash flow from operating activities (CFOA) had come in $1 billion below expectations.
During the Q1 2017 conference call, management has attributed the negative $1.6 billion in industrial CFOA to the timing related issues in collecting several large accounts receivable balances and several other one time issues. Managment expects the industrial cash flows to improve in the second quarter. "We think CFOA is going to be sequentially much better in the second quarter than the first," CFO Jeff Bornstein said on the earnings call. "And we would expect year-over-year CFOA to be better through the half, equal or better to the half."
Investors will be also watching out for GE's oil and gas business and its power generation segment. GE recently announced that Baker Huges merger has been closed and BAKER HUGHES GE (NYSE:BHGE) stock is now trading on NYSE with ticker BHGE. Investors will also be watching out for the company's profit margins. GE is on track to reduce structural cost by $1 billion for the year, which will help in margin expansion. Analysts expect GE to report an EPS of $0.25, more than 50% decline from the last year comparable quarter EPS of $0.51. GE's revenue is expected to decline by 13% YoY, from $33.49 billion to $29.02 billion. GE has a good track record reporting an earnings beat. The company has not missed the earnings estimate in last four quarters.
Is General Electric Company stock a buy now?
GE stock is gaining momentum going into earnings and its stock is up 3% this week. MACD has made a bullish crossover, indicating that the stock may continue its uptrend going into the Q2 earnings. However, the medium term prospects are still not bright and the stock has still not bottomed out. In a note to clients, JPMorgan's C. Stephen Tusa wrote that "while we expect a fresh start, a positive, we don’t see a quick or easy fix to the current predicament. Unlike other resets where the multiple expands, we don’t see the future growth potential as a catalyst here, and are cutting our price target to $22 and remain UW". Investors must wait for the more clarity regarding GE's future prospects before going long the stock.
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