Shares of GE appeared on Tuesday after General Electric ( GE ) crushed second-quarter revenue estimates, buoyed by its jet engine unit. Wall Street cheered “outstanding” results in that business as the industrial conglomerate looks set to emerge in 2024 as an aviation-focused company.
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Despite the big second-quarter earnings miss, General Electric simply affirmed its full-year EPS guidance and lowered its 2022 free cash flow (FCF) outlook by $1 billion due to pressures on working capital.
“We are improving delivery, price and cost performance through lean and decentralization (strategy),” GE CEO Larry Culp said in a July 26 earnings call. “Despite this progress, much is still uncertain about the external pressures facing companies at the moment.”
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GE’s earnings surprise in the second quarter
In the second quarter, General Electric’s earnings nearly doubled to 78 cents a share. Revenue rebounded nearly 6% to $17.88 billion. Analysts were expecting EPS of 37 cents, down 6.5% year over year, and revenue of $17.457 billion.
Free cash flow came in at $162 million, defying views of a cash burn of more than $800 million. Orders increased by 4%, with growth in services and equipment. Margins widened by 380 basis points.
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Among GE’s industrial segments, revenue rose 27% in aviation, as well as 4% in health care and energy. It fell 20% in renewable energy, which was also the only business segment to post a loss in the second quarter.
“Aerospace was a key driver of our performance this quarter as the industry’s recovery builds momentum,” CEO Culp said in the press release. In the second quarter, aviation orders rose 26% year-on-year. The commercial and military aircraft engine business grew by 47% more service demand, benefiting from higher shop visits and spare parts sales. But commercial engine shipments fell, with supply disruptions hurting shipments.
On Tuesday, GE reaffirmed tax-free spinoffs of its healthcare business in early 2023 and its energy business in early 2024, after which it will emerge as an aviation-focused company.
GE maintains Outlook
General Electric reiterated that it continues to target the lower end of its 2022 outlook. This includes guidance for high-single-digit revenue growth (20% for aviation) and adjusted EPS of $2.80-$3.50 . But GE cut its FCF guidance range, expecting $1 billion of that flow to be pushed beyond 2022 due to supply chain challenges and pressures on working capital.
The 2022 EPS guidance — after a strong second quarter — implies the second half of the year will be even weaker than expected, RBC Capital Markets analyst Deane Dray wrote in a note on Tuesday. “However, we believe there is an appropriate amount of conservatism,” he added.
Aviation was a “standout” among broad-based top-line strength in Q2, Dray noted. He added that free cash flow was another “bright spot” and expects the $1 billion deferral from FCF to be recovered eventually.
The analyst rates GE stock as an outperform, with a $94 price target.
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GE stock regains major level
Shares rose 6.5% to 72.79 in Tuesday’s stock trading. General Electric topped the 50-day moving average for the first time since April and is poised to extend its winning streak to eight sessions. GE shares hit 20-month lows in July.
The relative strength line for GE stock is starting to rise after a decline. A rising RS line means a stock is outperforming the S&P 500.
GE Aviation holds the key
like Raytheon Technologies (RTX), General Electric plans to focus on its higher-growth aviation business, leaving behind its storied conglomerate past. GE plans to complete its major split in early 2024.
Raytheon and 3 million (MMM) also reported early Tuesday. Shares of Raytheon fell 3.1% on Tuesday after missing second-quarter earnings. Shares of 3M rose 5.2% after a second-quarter loss. Among other peers, Roper Technologies (ROP), which beat second-quarter earnings views on July 22, eased 0.7%.
Both GE and Raytheon produce jet engines for embattled aircraft manufacturers Boeing (BA), which landed a number of new aircraft orders at last week’s Farnborough International Air Show. Boeing reports early Wednesday.
On July 18, GE asserted that its historic split remains on track and named the three companies that will go public in 2023-2024: GE Aviation, GE HealthCare and GE Vernova (which houses its energy and renewable energy businesses ). General Electric first announced the big breakup last fall, after years of costly restructuring efforts. Investors also fell out of love with the conglomerate’s business model.
Also on July 18, the industrial giant announced that Delta Air Lines (DAL) and Qatar Airways had selected its Leap-1B engines to power their Boeing 737-10 fleet.
Year to date, GE stock is down 23%. Raytheon is up 6.4%.
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