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GE Fell ~5%, CEO Warned about a Negative Cash Flow in 2019

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Negative industrial FCF

On March 5, General Electric (GE) shares fell ~5% after CEO Larry Culp warned about a negative industrial FCF (free cash flow) in 2019 due to the company’s ailing power business. The fall in General Electric’s share price marked the biggest drop for the company in the last three months.

According to Reuters, in a webcast interview with JPMorgan Chase (JPM) analyst Stephen Tusa, Culp said that the company’s underperforming power business will likely struggle more in 2019 than last year, which could weigh on its overall cash flows.

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General Electric generated an industrial FCF of $4.5 billion in 2018 despite recording a negative FCF of $2.7 billion in the power division. During the webcast interview, Culp said, “I don’t want to sugarcoat” the problem with the power business. He said, “We’ll see that be a greater negative number in this year as we work through the restructuring, as we work through the runoff liabilities there and just the localization of timing around projects.”

Struggling power business

General Electric’s power business is struggling to cope with changing industry dynamics. The segment has been underperforming for several quarters. Rising demand for renewables and energy efficiency hampered the demand for fossil fuel–based power plants. For General Electric, the power division’s performance depends on the coal and gas turbine market.

General Electric’s acquisition of Alstom Energy in 2015 added to its woes. At the time of the deal, the industrial conglomerate (XLI) said that the buyout would expand its portfolio and enhance its existing offerings in gas power and services. General Electric pointed to cross-selling and cost benefits from the deal.

Some big natural gas–fired power plant builders, including Dominion Energy (D) and Vistra Energy (VST), are lowering their dependence on fossil fuel–based power plants and moving to renewable resources.

Culp has undertaken several initiatives to revive the power business including a management reshuffle and splitting the unit into two different divisions. However, the initiatives are still at a very nascent stage. There’s still much more work to do to revamp the power business unit.

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