Negative cash flow
General Electric (GE) stock fell 0.6% on May 15. The company expects its ailing power plant business to lose significant cash this year. The company also downplayed speculation of any quick turnaround in the troubled power unit.
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According to Reuters, at Goldman Sachs’ investor conference, General Electric’s CFO, Jamie Miller, said, “Power was a very significant negative cash flow generator last year. We expect it to be also significantly negative this year.”
General Electric’s power unit lost $22.8 billion last year due to asset write-downs worth $22 billion and an operating loss of $808 million. The division booked a negative free cash flow of $2.7 billion. As a result of the massive negative cash flow in the power division, General Electric’s overall adjusted industrial free cash flow in 2018 fell ~19% YoY (year-over-year) to $4.5 billion from $5.6 billion.
Miller expects the weakness in General Electric’s Power division to hurt the company’s overall adjusted industrial free cash flow more this year. He expects that General Electric will lose ~$2 billion in cash this year.
More time for the revival
Miller also hinted that it would take longer than expected for the power unit’s revival. During the conference, he said that it would take at least three more years for the troubled business to make a turnaround and reinstate its previous cash flows and margins.
Miller’s latest remarks were in contrast to CEO Larry Culp’s statement during an interview with JPMorgan Chase analyst Stephen Tusa. During the meeting, Culp said that the power unit’s free cash will be negative until 2020. Culp expects the power unit’s free cash to turn positive in 2021. However, Miller’s remarks stated a recovery in 2022.
Miller’s comments dampened investors’ optimism. Investors’ optimism increased the previous day. Reuters reported that General Electric won the highest gas turbine orders in the first quarter. Reuters disclosed that General Electric’s power division booked six orders for its most advanced HA class gas turbines. Mitsubishi Hitachi Power Systems and Siemens AG received orders for five and four turbines, respectively.
The Industrial Select Sector SPDR ETF (XLI), which tracks the performances of industrial-sector stocks in the S&P 500, has allocated ~3.6% of its funds in General Electric stock. The ETF has also allocated 4.5%, 4.8%, and 5.5% of its funds to 3M Company (MMM), United Technologies (UTX), and Honeywell (HON), respectively.