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General Electric's power supply will not be nice – The Motley Fool



General Electric (NYSE: GE) The fourth quarter's results were quite good, but the lack of guidance will not please all investors. In particular, the lack of color in relation to the energy segment creates uncertainty about the future direction. GE Power needs to recover to mitigate concerns about profits and cash flow should global growth slow and impact GE Aviation's earnings in the future. Let's take a look at what to expect when GE finally forecasts the energy segment – something CEO Larry Culp had promised he would do soon.

What the Bulls Expected from GE

With a positive GE assessment in 201

9, we hoped that the fourth quarter would be a turning point for GE Power. Finally, some of his problems, such as the failure of the paddle turbine, could prove to be fixable in the short term. Meanwhile, some of the other problems could be resolved in the medium term. These include operational issues, capacity reductions and the transformation of GE's forecast of profit and cash flow from its power supply contracts.

  A magnifying glass over a number-filled page.

Source: Getty Images.

The hope was that GE's management would make every effort to offset the losses at GE Power in order to reduce expectations for future margins from a low base.

Unfortunately investors got access The low base but not the guidelines were reset – and there was not much encouraging comment that the energy segment was firmly on track.

After a third-quarter loss of $ 631 million from GE Power in the third quarter, the segment reported a loss of $ 872 million in the fourth quarter, which increased segment loss for the full year to $ 808 million – Let's remember that GE had expected the year with a profit of 2.45 billion US dollars (19459013) for the segment (19459014). In addition, Culp and CFO Jamie Miller announced that the energy segment had a cash outflow of $ 2.7 billion in 2018.

Lack of detail

Listening to the results presentation, the lack of details on the keys questions have not done much for the bullish case set forth above.

For example, when Barclays analyst Julian Mitchell asked about wins such as charges and project overruns in power – maybe to find out what GE is. The underlying profit of the Power Division could be without the one-time problems – it did not get any accurate information.

Joe Ritchie, Goldman Sachs analyst, asked if GE Power's $ 2.78 billion free cash flow outflow would improve or worsen in 2018, but management declined to provide details.

When Cowens Gautam Khanna posed a key question of when prices in the transaction aftermarket are expected to bottom out and how prices compare to those of a year ago Russell Stokes, the former head of GE Power, raised the internal Improvement management that is expected with its transaction services. GE Power's contract services proved to be good.

Former CEO John Flannery also argued that GE Power could improve its margin from 5.6% in 2017 to 10% in a few years, partly due to maximizing the value of its transaction services. However, the improvement was slow and Miller noted that it had increased the margin rate of the transaction services in some cases by 10, 12, 15 [hundredths of a percentage point] in this order book. She added that "it has been steadily increasing throughout the year," but GE does not yet see it through, largely due to field performance issues and operational issues. "

This is set far from the one to two percentage points of Flannery as a medium-term goal to improve the transaction performance margin.

What Culp does about it

More positively, Culp takes decisive action to reduce costs and restructure GE Power. The split into two units (gas equipment and services in one unit, the rest in another) will make it easier to sell / broker one of them and could improve transparency in terms of performance.

In addition, GE's network, solar and storage assets in the renewable energy business will mean that the renewable energy business now offers an end-to-end supply to renewable energy customers The demand for renewable energy generation and grid integration continues to rise worldwide, "Culp said.

What Can Investors Expect From GE Guidelines

If one summarizes all this, it is likely that the short-term Forecasts for GE's energy segment are not pretty, but what about the medium term? The rating agency Fitch has stated that GE's rating could be downgraded if GE Power is not on track by 2020, with expectations or a margin improvement to reach in the mid to high single-digit range.

Investors should be pleased if Culp gives this guide Of course, improving the equipment margin in a declining end market will be difficult, and we have already seen that the margin expansion for transaction services is difficult, essentially cutting costs. This could increase by three to five percentage points, according to Flannery Medium-term margin expansion.

All in all, GE Power margin guidelines are critical. Assuming the value of 5.6% for 2017, it can be expected that Culp will reach a high single-digit level by 2020. If so, the rise of the stock in 2019 could get a second wind.


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