Shares of General Electric Co. dropped Tuesday, as an adjusted first-quarter profit beat, upbeat free cash flow and an affirmed full-year outlook wasn’t enough to extend their recent win streak, as revenue fell a bit shy of forecasts.
The negative investor reaction could also be a result of relatively high expectations, as the stock has been rallying while analyst estimates have been declining. And while adjusted profit beat the consensus of sell-side analysts, it was below the consensus compiled by Estimize, which also sources buy-side analysts, company executives and academics.
The stock GE slumped 3.7% in morning trading, after climbing 3.9% over the past four sessions. The stock was still up 21.0% year to date, to outperform its peers, with the SPDR Industrial Select Sector exchange-traded fund XLI up 14.9%, and the broader market, with the S&P 500 index SPX up 11.3%.
On a net basis, GE swung to a loss of $2.87 billion, or 33 cents a share, from net income of $6.16 billion, or 70 cents a share, in the same period a year ago. Excluding discontinued operations, the company broke even on a per-share basis.
Excluding nonrecurring items, such as pension-related and restructuring costs, adjusted earnings per share rose to 3 cents from 2 cents a year ago, beating the FactSet consensus of 1 cent.
Meanwhile, the Estimize consensus was for EPS of 4 cents.
Total revenue declined 12.2% to $17.12 billion, below the FactSet consensus of $17.59 billion, to mark the first quarterly revenue miss since the third quarter of 2019. The Estimize consensus was $17.93 billion.
Among GE’s business segments, Aviation remained the biggest problem area, as the COVID-19 pandemic wreaked havoc on the industry. Revenue for the business dropped 28% to $4.99 billion, missing the FactSet consensus of $5.28 billion. The decline was due primarily to a double-digit percentage decline in commercial engines and a 40% drop in commercial services.
“Clearly, we need aviation to come back,” said Chief Executive Larry Culp, in the post-earnings conference call with analysts. “All in, we continue to believe the aviation recovery is a matter of when, not if.”
Chief Financial Officer Carolina Dybeck Happe said she believes the recovery in the aviation end markets will begin in the “second half” of this year.
Elsewhere, Power revenue slipped 3% to $3.92 billion, below expectations of $4.00 billion, and Renewable Energy revenue rose 2% to $3.23 billion, but came up just shy of the $3.26 billion expected.
Healthcare was the lone segment to beat expectations, as revenue fell 9% to $4.31 billion but topped expectations of $4.09 billion. Orders improved on an organic basis as COVID-19-related pressures continued to ease, with elective procedures returning to pre-pandemic levels, Happe said.
“Demand for non-pandemic products was solid, as government stimulus drove strong order growth in China, India and Japan,” Happe said. “Meanwhile, demand for pandemic-related products began to normalize.”
Industrial free cash flow (FCF) improved to negative $845 million from negative $2.21 billion a year ago. The average FCF estimate of the two analysts who provided estimates to FactSet was negative $1.21 billion, with a range of negative $870 million to negative $1.55 billion.
GE affirmed its 2021 guidance ranges for adjusted EPS of 15 cents to 25 cents and for industrial FCF of $2.5 billion to $4.5 billion. The FactSet consensus for full-year EPS is 23 cents and for FCF is $3.89 billion.
Inflation has been a ‘wash,’ supply issues ‘isolated’
When asked on the call with analysts, by RBC Capital’s Deanne Dray, about the “angst” felt across the industrials sector toward cost inflation and supply chain disruptions, Culp said, GE was “clearly seeing some price pressure,” in organics, resins and certain metals.
“But I think we’ve also been able to mitigate that in the first quarter to effectively a wash,” Culp said, according to a FactSet transcript. He said cost cutting has been pursued, as well as price increases where possible.
He said GE has experienced some supply issues, particularly in the Healthcare and Renewable Energy businesses, but said at the moment it has been more “isolated.”
Don’t worry about pension funding for years
CFO Happe said that the $2.5 billion GE spent in 2020 to pre-fund its pension plan will pay dividends for years to come.
“[W]e do not anticipate any further planning requirement for the GE pension plan in the foreseeable future,” Happe said on the call. “And by that I mean the end of the decade.”
Baker Hughes investment swung to a net gain
Net interest and investment income swung to a gain of $439 million in the first quarter from a loss of $5.63 billion a year ago.
That included an unrealized pretax gain of $296 million from GE’s investment in Baker Hughes Co.
after an unrealized loss of $5.71 billion last year.
Also, as part of the three-year plan launched in 2020 to fully cash in on its Baker Hughes stake, GE said it received proceeds of $700 million in the first quarter of 2021, and expects to receive about $1 billion in the second quarter.
GE had said in late-January that it owned a 30.1% stake in Baker Hughes, which at the time would have been valued at roughly $6.5 billion.