💡 Does GE’s Culp Have All The Answers?

Tesla beats revenue, profit estimates.

Hey Global Investor! Here’s what you need to know before the US markets open.

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💡 GE: Where Does “Culp”ability Lie?

General Electric’s (GE) Q4 revenue missed expectations while EPS surpassed estimates. However, despite positive commentary on cash flow, revenue growth, and debt reduction, investors were unimpressed. Does GE’s path ahead make investors a nervous bunch? (Tweet This)

This Train’s Arrival Seems Delayed

To say that Larry Culp had a “daunting” task ahead of him when he became CEO of GE in September 2018 would be the understatement of the century. He took charge of GE when there was a massive erosion of trust and value like never before in its history. Add to it a debt burden of over $100B. Culp, to his credit, has managed to recoup some, if not all, of that past glory.

Notably, Culp jettisoned GE’s aircraft leasing business and merged GE Capital, its financial services division, into its broader corporate operations.

These past three years, GE has managed to bring its net debt down to $41B through asset sales and stake sales. Net Debt/EBITDA in 2018 was 4.8X, which came down to 3.3X at the end of 2021. The net-debt-to-EBITDA ratio shows how many years it will take for a company to repay its debt if net debt and EBITDA are constant. The company hopes to bring this number down to 2x this year.

Debt reduction aside, GE bore the brunt of lingering supply chain troubles that impacted its Q4 topline, with its healthcare unit facing the supply chain music the most.

Key Highlights From Q4:

  • Revenue: $20.3B Vs $21.4B expected
  • EPS: $0.92 Vs $0.84 expected
  • Industrial Free Cash Flow: $3.8B Vs $3.29B expected

GE Aviation, the perennial cash cow, has been under pressure since the pandemic, but its sales rose 4% Y-o-Y. Sales in the renewables business fell 5.6% Y-o-Y and aren’t expected to do much better this year, with inflation expected to intensify further.

For this year, revenue growth is expected to be in single digits; EPS of around ~$2.15 (compared to $1.71 in 2021); industrial free cash flow of ~6B (compared to $2.6B in 2021). The positive news surrounding cash flow and debt didn’t move investors much, and GE’s shares fell 6% on Tuesday. What gives?

The Seemingly Never-Ending Challenges

In November, GE announced it was splitting into three independent entities focusing on aviation, healthcare, and energy businesses, to be held under a holding company. The Hold Co would retain a 20% stake in the healthcare subsidiary, which would be spun off in early 2023. The energy unit would be spun-off in early 2024.

Based in Chicago, GE Healthcare has over 6K employees in Wisconsin. The division manufactures medical systems such as X-ray machines, Magnetic Resonance Imaging (MRI) machines, and CT Scanners.

CT Scanners, despite heavy demand, have faced production issues due to supply chain snarls and rising input costs that are facing customer push-backs. This has pegged the division’s revenue back by 8%-9% in the second half of 2021. GE’s competitor Philips complained last week that customers are postponing equipment installations.

On the renewables front, there is uncertainty whether US production tax credits for onshore wind investments will be extended over the long term. As a matter of concern, rival Siemens Energy’s wind power division, Siemens Gamesa, cut its financial outlook for the third time in nine months owing to surging costs.

Aviation is coming off of a severe downturn, but there are questions surrounding how much debt will be allocated to it when these businesses are to be spun off due to the capital-intensive nature of the game.

Back in November, when the split was announced, the investors had an immediate cheer. Since then, they’ve been reading the tea leaves, and the uncertainties surrounding the restructuring are only adding to their befuddlement.

Culp may have navigated successfully thus far, but the challenges he faces in the future are no less daunting than the ones he just helped the company steer clear of. But, as GE lives to see another day, there seems to be no dearth of concerns. On the other hand, Culp continues to trudge forward, nose to the ground!

Market Reaction
GE ended at $89.32, down 1.96%.

Company Snapshot 📈

GE $89.32 -1.79 (1.96%)

Analyst Ratings (24 Analysts) BUY 63%  HOLD 33%  SELL 4%

Newsworthy 📰

Scaling: Tesla beats on earnings and revenue, says supply chain issues were main limiting factor (TSLA +2.07%)

Challenge: Intel posts record quarterly revenue, sees supply strains through the year (INTC -2.79%)

Cashing In: Casual denim trend, higher prices fuel Levi’s upbeat forecast (LEVI +8.61%)

Later Today 🕒

  • Apple Inc. Earnings (AAPL)
  • Blackstone Group Inc. Earnings (BX)
  • Mastercard Inc. Earnings (MA)
  • Visa Inc. Earnings (V)
  • Comcast Corp. Earnings (CMCSA)
  • Robinhood Markets Inc. Earnings (HOOD)
  • McDonald’s Corp. Earnings (MCD)
  • Southwest Airlines Co. Earnings (LUV)
  • Nucor Corporation Earnings (NUE)
  • Applied Industrial Technologies Inc. Earnings (AIT)
  • Arthur J Gallagher & Co. Earnings (AJG)
  • Ball Corporation Earnings (BLL)
  • Canadian Pacific Railway Ltd. Earnings (CP)
  • Danaher Corporation Earnings (DHR)
  • Dow Inc. Earnings (DOW)
  • JetBlue Airways Corporation Earnings (JBLU)
  • Juniper Networks Inc. Earnings (JNPR)
  • Mondelez International Inc. Earnings (MDLZ)
  • Sherwin-Williams Co. Earnings (SHW)
  • T Rowe Price Group Inc. Earnings (TROW)
  • Taro Pharmaceutical Industries Ltd. Earnings (TARO)
  • 7:00 PM IST: Initial Jobless Claims
  • 7:00 PM IST: Gross Domestic Product
  • 8:30 PM IST: Pending Home Sales Index

Today’s Market Terminology: Call Money Rate

Also known as broker loan rate, it is the interest rate that banks charge brokers to finance margin loans to investors. The broker charges the investor call money rate plus a service charge

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