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General Electric’s 1Q17 Results Beat Estimates: Stock Fell 2.5%

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Part 11
General Electric’s 1Q17 Results Beat Estimates: Stock Fell 2.5% PART 11 OF 12

Are Cash Flows from GE’s Industrial Operations a Concern?

GE’s cash flows

In 1Q17, weak cash flows from General Electric’s (GE) industrial operations remained the company’s Achilles’s heel. Looking at GE’s 1Q17 earnings release, we see that Industrial’s cash flow was -$1.6 billion. In sharp contrast to GE’s estimate of $600.0 million negative cash flow, the huge negative Industrial cash flow makes investors nervous.

Are Cash Flows from GE&#8217;s Industrial Operations a Concern?

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Reasons behind the fall in cash flows

Let’s take a detailed look at the $1.0 billion miss in Industrial’s cash flows from operations. On further investigation, we see that the Power and Aviation segments were the chief culprits for cash flow shortages in 1Q17.

In the 1Q17 earnings call, GE’s CFO (chief financial officer) Jeffrey Bornstein said, “In Aviation, which we had a couple of hundred million of past dues that we don’t normally experience in Aviation, those are already clearing here in the second quarter. And then some big past dues in the Middle East in our power business that are on schedule. They—we will collect the majority what we expect to collect in the first quarter. We’ll do that in the second quarter.”

It’s worth noting that Jeffrey Immelt, GE’s CEO (chief executive officer), said, “On cash, we have CFOA of $400 million. This included a dividend from GE Capital of $2 billion…. There’s no change to our 2017 framework of total CFOA of $18 billion to $21 billion and industrial CFOA of $12 billion to $14 billion.”

Our analysis

Looking at GE’s cash flow management, it doesn’t seem to be a problem. However, what’s concerning is how the CFOA (cash flow from operating activities) target of $12.0 billion–$14.0 billion in Industrial would be achieved in the rest of 2017. That will most likely put a strain on GE’s receivables collection in the coming quarters. It also puts a question mark on the company’s ability to raise dividends in the future if it doesn’t meet its industrial CFOA target for 2017. Borrowing money and giving it back to shareholders through stock repurchases is probably not a good idea.

ETF investments

GE makes up ~10.0% of the Industrial Select Sector SPDR ETF (XLI). XLI also has exposure to some of GE’s close competitors, including 3M (MMM), Honeywell International (HON), and some of GE’s customers such as Union Pacific (UNP).

In the last part of our post-earnings series, we’ll see what analysts think about General Electric (GE) after its 1Q17 results.

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