Summary
- GE reported Q2 earnings, satisfying street expectations and showing better than expected Industrial free cash flow.
- The Power division continues to lag, which is concerning ahead of the Q3 asset and goodwill review.
- Healthcare and Aviation continue to be bright spots and the cash inflow from the Biopharma sale should help to enhance this positivity.
GE (GE) reported second quarter earnings last week and now that the first half of the year is in the books for the company, it's an appropriate time to do a full evaluation of where the business stands. The stock has been trading in a relatively muted fashion, despite an impressive January performance, with the valuation failing to be highly attractive. Significant risks are still ahead of the company, namely the Q3 goodwill and asset review, but I believe the progress made YTD under CEO Larry Culp sets the stage for an interesting 2020 and it makes the case for this stock to be investable in twelve months' time.
Source: Yahoo! Finance
Organic Growth Back Again?
In order to make an investment in GE, I feel that shareholders have to set a high bar for earnings rather than a low one or the stock's performance will only end up disappointing them. All things considered in this report, organic growth at GE looks healthy. First, organic orders were +4% on a YOY basis, with the Industrial segment at +7%. The Industrial segment seems to be of the utmost importance to investors and, as such, we'll look at the free cash flow profile. Here, it's really the working capital management and level of capital expenditure that are dragging down industrial free cash flow.
While GE remarks that the 1H 19 industrial FCF is ahead of their prior FY outlook, it's still not anywhere near where investors want it to be. Additionally, it's not easy to lower capex as a high portion of this is likely maintenance capex, as opposed to growth, so the company is left with the task of implementing a solution to improve working capital management.
