We're Impressed With GE's Free Cash Flow
CEO Larry Culp is effectively leading the firm through a multiyear turnaround.
GE (GE) performed slightly ahead of our expectations for free cash flow year to date. The strong cash performance prompted management to raise the range of its industrial free cash flow guidance from negative $1 billion to $1 billion up to $0 to $2 billion. We are impressed by this performance, and we think it’s yet another data point that supports our long-term thesis on the stock: GE has valuable assets that serve vital portions of global industry, and CEO Larry Culp will lead that firm through a multi-year turnaround. Despite little short-cycle exposure relative to other industrials, except for Healthcare, GE accomplished this feat against a difficult macroeconomic backdrop and considerable 737 Max headwinds in its most valuable business in GE Aviation (most of the earning power of the company rests in this segment). As a result, we don’t expect to materially alter our fair value estimate, though we note there could be some slight upward pressure due to time value of money.
Bears will no doubt point out one of three items: 1) the raised free cash flow guidance comes off reduced industrial restructuring of about $200 million; 2) orders are down 1% organically year over year; and 3) Aviation benefits from some cash allowance buildups, and once they reverse the emperor will be missing “its wardrobe.” We disagree with these points of contention. Yes, restructuring is down, but ultimately one must ask why is restructuring down. In our view, restructuring spend is lower given greater-than-expected fundamental performance (and less about timing). Despite continued difficulty in the gas power transactional services book, the underlying gas power appears to finally be stabilizing along with the overall business. GE is also making better-than-expected progress on its supply chain finance transition, which we think will provide greater clarity around the 2021 free cash flow debate.
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Joshua Aguilar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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