Why Third-Quarter Earnings Look Key for General Electric Stock

Under CEO Larry Culp, General Electric (NYSE:GE) is in the middle of a complex, multi-year turnaround. So far, those efforts have done little for the GE stock price, which sits just above $9. General Electric stock has gained 21% so far this year,  but those gains have come off multi-year lows GE stock reached in December.

Why Third Quarter Earnings Look Key for General Electric Stock
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Put another way, investors still are in “wait and see” mode. Culp took over on Oct. 1 of last year to much fanfare. The GE stock price closed that day at $11.62, and then fell 23% during the CEO’s first year.

GE’s third-quarter earnings on Oct. 30 aren’t going to definitively answer whether the turnaround is going to work. General Electric still has a long way to go.

But any progress shown by the company’s Q3 results could do wonders for General Electric stock. Near-term trading is going to depend on confidence in the company’s longer-term success. There’s a way for Culp and GE to inspire that confidence on Wednesday.

No News Will Be Good News for General Electric Stock

Job one for GE in the Q3 report is simple: no surprises. GE Capital has been a source of investors’ worries, most notably when the company in early 2018 disclosed a $6 billion charge related to its long-term care business.

The market for now seems convinced that there are no more issues lurking. GE stock has largely shaken off a 175-page  report funded by short sellers of General Electric stock.  Issued in August, the report alleged that the the company had committed accounting improprieties. Any further disclosures will rattle investors’ already-shaky confidence.

Free cash flow will be another point of focus. Bears long have pointed to the gap between GE’s adjusted earnings and its free cash flow, which suggests that GE has used accounting to improve its profit numbers. Coming out of Q2, GE guided for industrial free cash flow (i.e. free cash flow excluding GE Capital) to be between negative $1 billion and positive $1 billion.Against a market cap still at $77 billion, that range isn’t particularly impressive.

Still, moving the guidance entirely to the positive side would be a big help for GE stock price. But simply maintaining the range should be good enough for long-term General Electric stock bulls to stick around for another quarter.

On the sales and earnings front, expectations are reasonably low. Analysts, on average, expect adjusted earnings per share of 11 cents, against 14 cents the year before, and a 2% year-over-year revenue decline.

GE did raise its 2019 EPS guidance by a nickel after Q2, so another hike seems unlikely. But simply reiterating the existing 55 cents to 65 cents range might well be good enough, given the current GE stock price.

The Outlook of GE Stock

All told, I wouldn’t necessarily expect fireworks from GE’s Q3 results. Again, GE stock is a long-term story, and Culp has been extremely active in his first year on the job. He’s sold its aircraft leasing business, merged its transportation unit with Wabtec (NYSE:WAB), sold off some of its shares in Baker Hughes (NYSE:BKR), and sold its GE BioPharma business to Danaher (NYSE:DHR), his former employer.

The company is obviously leaner now. And the outlook of GE stock largely seems to come down whether the “good” businesses — Aviation and Healthcare — can prosper while mitigating the damage from the “bad” businesses – Power and perhaps Capital.

So beyond the headline numbers, the performance of each unit will be key. Can Power, which showed some modest improvement in Q2, keep rallying? How is Aviation managing the issues relating to Boeing’s (NYSE:BA) 737 MAX? Has GE fixed its own problems with the GE9X engine for Boeing’s 777x planes?

Again, the Q3 results won’t necessarily break or confirm the bulls’ contentions about General Electric stock. Options market are pricing in just a 7% move in the GE stock price over the next week and a half. Barring a huge beat or miss, Wednesday’s report isn’t likely to dramatically change the current perception of GE stock.

But General Electric can at least create some confidence that it’s headed in the right direction. I argued last year that, on a sum-of-the-parts basis, GE stock likely was worth between $11 and $13. I still think that’s roughly accurate.

If GE can convince even some investors that it’s on a path to unlocking that value, GE stock should return to the double-digits. If, however, the results indicate that it’s not on such a path, bearish price targets on General Electric stock of around $5 are in play. So GE’s Q3 results matter for reasons that go well beyond the headline numbers.

As of this writing, Vince Martin has no positions in any securities mentioned.

 


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