General Electric: Numbers Game
General Electric (GE) is selling its industrial solutions business to Swiss rival ABB for $ 2.6 billion. The company is clearly targeting underperforming plants and putting them up for sale. This is one way to improve its free cash flow problems, and we can expect more of this in the near future. The stock has bounced from its key support level, and bulls are in full control. The new CEO is expected to give an update on the 2018 outlook in November. I expect the stock will continue to recover from its previous losses.
Free Cash Flow
It’s all about free cash flow. As we can see from the below chart, GE’s free cash flow has been sliding. Wall Street analysts estimate the company’s free cash flow for fiscal 2017 at $ 7.5 billion.
Once the company improves its free cash flow, the market will react positively. From a shareholder point of view, free cash flow is very important because it sustains confidence that the company will continue to pay dividends. From the company’s point of view, it has enough free cash flow to service its debt and further expand its business; the company is trying to improve its free cash flow through various measures, such as getting rid of underperforming assets and reducing corporate overhead.
As we can see from the above chart, regardless of declining free cash flow, the stock has still been on the uptrend. In terms of technicals, the stock didn’t break the key support level, but bounced back instead, suggesting that the bulls are in control. With more positive news to be anticipated from the new CEO, I expect the stock will continue to recover from its previous losses.
Oil prices are gradually recovering, so the newly merged Baker Hughes, a GE company (BHGE), should post better earnings. With the help of BHGE and other segments, GE’s free cash flow should improve substantially.
Since the company is working to address its free cash flow problem, it is safe to conclude that there is no serious danger of a dividend payment cut. In 2016, GE’s industrial solutions business generated $ 2.7 billion in total revenue and posted a profit margin of 2.1% (making it one of the least profitable business units). To me, any profit is good–but underperforming business units would be pulling the company’s overall performance down. By getting rid of underperforming plants, amongst other measures, the company should be able to generate higher free cash flow. It’s all about numbers in the end, and based on those numbers, I still recommend GE as a buy.
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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.