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General Electric: 2019 Optimism Warranted?

Feb. 04, 2019 12:47 PM ETGeneral Electric Company (GE)HON, UTX62 Comments


  • Larry Culp has stayed on message, but as a cautious investor, I have not seen much change from the Flannery line of thinking.
  • Shares have quickly rallied towards Wall Street sum-of-the-parts expectations. With the discount likely gone, at the very least the easy money looks gone.
  • At worst, new investors might lose patience when year-end 2019 will not show much change versus what was just reported.
  • This idea was discussed in more depth with members of my private investing community, Industrial Insights. Start your free trial today »

It’s interesting to me to see some investors celebrate gaining a quarter after losing a dollar and that is essentially what has happened (or worse) for longer term General Electric (NYSE:GE) shareholders. While I laud Larry Culp for staying on message since his appointment to the CEO slot in October, I’d challenge investors to ask what has exactly changed in overall corporate direction. The message remains the same: “Delever the balance sheet, divest and/or IPO assets, strengthen the Power business”. This isn’t a fast shift and the market seemingly accepted 2019 as a junk year with little to no transparency on growth, earnings expectations, and restructuring and spin-off costs. Combined with Larry Culp saying that “I don’t think I would ever say, even on my last day, that we have found all the skeletons [in the closet]” (Source: Q4 conference call), I’m a bit surprised at the latitude the market is giving the firm heading into what will be, at best, an extremely tough transitional year. With shares now approaching what is widely viewed as the current sum of the parts, it’s tough to see upside potential.

Major Themes – Some Positive, Some Negative

No free cash flow for Industrial debt reduction in 2019

Analyst consensus is for about $14,700M in EBITDA this year. This already bakes in operational improvement from 2018 ($13,250M) just due to the take-out of costs versus organic revenue growth. Assuming capital expenditures stay flat and interest expense remains in line, this backs into industrial free cash flow in the $4,900M range on an adjusted basis. Not a terribly surprising number and one that will be pretty close to 2018 levels; however, this does not factor in the expected $4,000M capital contribution to GE Capital and any restructuring costs associated with Power. The $0.01/share dividend, while small, is still a chunky payout as well given the outstanding share count. Based on my

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This article was written by

Michael Boyd profile picture
Compelling income and growth plays in the energy sector.

Author of Energy Investing Authority

Top 1% Analyst According to TipRanks

I have a decade of experience in both the investment advisory and investment banking spaces, with stints in portfolio management, residential mortgage-backed securities, derivatives, and internal audit at various firms. Today, I am a full-time investor and "independent analyst for hire" here on Seeking Alpha.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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