GE Swings To Profit In Q4, Settles DoJ Mortgage Probe

GE Swings To Profit In Q4, Settles DoJ Mortgage Probe
February 1, 2019

 

General Electric reported lower-than-anticipated earnings in the final quarter of fiscal 2018. However, the market was focused on the substantial rise in revenue that surpassed analysts’ estimates. The company also swung to a profit in the fourth quarter. Furthermore, the market breathed a sigh of relief as the report did not contain any unpleasant surprises.

The results also indicated that the company had enough cash flow to meet its obligations. The company also revealed that it had reached a $1.5 billion settlement with the Department of Justice over its subprime mortgage operations before the 2008 financial crisis. The positive results and subprime mortgage settlement with the DoJ triggered a massive wave of buying as well as short-covering leading to an 11.65% rise in the stock price to $10.16.

The stock registered its biggest single-day rally in nine years. Out of 13 quarters, the shares of GE declined on 11 quarters by an average of 2.7% (FactSet estimate) when the earnings were reported. So, GE investors would undoubtedly be thrilled about the rally.  In the past three months, GE had gained about 3% but is still down 36% on y-o-y basis.

 

Upbeat revenue propels GE stock

The Boston, Massachusetts-based company reported 4Q18 revenues of $33.28 billion, up 5% from $31.60 billion in the year-ago period. The Wall Street analysts had anticipated revenues of $32.59 for the fourth quarter.

For 4Q 2018, GE posted consolidated net earnings of $574 million or $0.07 a share, compared to a net loss of $11 billion or $1.27 a share in the similar quarter last year.

Earnings from continuing operations were $666 million or $0.08 a share in the recent quarter, compared to a loss of $11.18 billion or $1.29 a share in the similar quarter last year.

The fourth-quarter earnings per share of $0.17, adjusted for non-recurring costs and discontinued operations, missed analysts’ expectation of $0.22 a share.

Segment wise, results are given below:

  • Power – $6.760 billion Vs $9.011 billion down 25% on y-o-y
  • Renewable Energy – $3.361 billion in 4Q18, up 28% from $2.618 billion in 4Q17.
  • Aviation – $8.456 billion, against $7.010 last year, representing a gain of 21%
  • Oil & Gas – $6.250 billion, an increase of 8% from 5.786 billion from the prior year period.
  • Healthcare – $5.398 billion, compared with $5.314 billion in the similar quarter last year.
  • Transportation – $1.152 billion versus $929 million, reflecting a growth 24% on y-o-y basis.
  • Lighting – $451 million, down 16% from $534 million in the prior-year period.

The company was able to generate $10 billion in cash during the fourth quarter, mainly due to dividend cut and the partial sale of its stake in Baker Hughes (BHGE), an oil services company. However, cash flow from operations declined 8.6% on a y-o-y basis to $6.4 billion.

Industrial free cash flow for fiscal 2018 was $4.50 billion, a measure closely watched by investors, according to Gordon Haskett analyst John Inch, with $4 billion seen as the primary threshold.

During FY18, GE Capital divested assets worth $15 billion and reduced its debt by $21 billion. Notably, the company’s insurance portfolio has $124 billion in assets.

GE disclosed that it had reached a precursory $1.5 billion settlement with the Department of Justice, which was scrutinizing GE Capital’s now obsolete WMC mortgage business. Investors will be quite relieved as GE had earlier set aside $1.5 billion of reserves for such a settlement.

Larry Culp, the former CEO of Danaher, took over as CEO in October 2018 from John Flannery, who was unexpectedly removed after only a year on the job. Culp is determined to bring down the GE’s $100 billion debt pile.

Commenting on the Q4 2018 results, Chairman and CEO Larry Culp said: “Our strategy is clear: de-leverage our balance sheet and strengthen our businesses, starting with Power. We have more work to do, but I’m encouraged by the changes we’re making to strengthen GE and create value for our shareholders, customers, and employees.”

GE did not provide any outlook for FY19. However, CEO Larry Culp stated that “industrial revenue would be up ‘low-to-mid single digits’ in 2019.” Culp further stated that the company’s power business might experience a “flat to slightly down” market next year.

Commenting on the results RBC Capitals analyst, Deane Dray said: There should be a relief that the earnings and cash flow cadence this quarter were reasonably close to expectations and certainly did not present any new surprises.” Deane Dray has also issued an “Outperform rating” for the stock, with a target price of $10.

Likewise, Andrew Kaplowitz, an analyst at Citi Research, said the fourth quarter represents “a step in the right direction toward recognizing the significant value we still see in GE shares.”

However, Kaplowitz warned that there remain “significant unanswered questions with regards to GE’s near- and longer-term potential.” Kaplowitz has issued a “Buy rating” for the stock, with a $15 price target.

Other prominent analysts’ ratings and price target are set out below:

  • Credit Suisse’s John Walsh – Neutral rating, $10 price target
  • Cowen’s Gautam Khanna – Market perform rating, $8 price target
  • CFRA’s Jim Corridore – Buy rating, $13 price target
  • Barclay’s Julian Mitchell – Overweight rating, $12 price target
  • Melius Research’s Scott Davis – Positive rating, $21 price target

The results indicate that the stock will remain bullish in the short-term.

Technically, the stock has closed above its descending trend line. Furthermore, the MACD indicator has a positive reading. As a result, we can expect the stock to remain bullish in the days to come.

GE - technical analysis - 1st February 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

 

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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