Shares of General Electric Co. leaned lower Wednesday, after the industrial conglomerate provided some new details on the expected impact from the coronavirus outbreak, as well as from the 737 MAX groundings and the Federal Reserve’s interest rate cut, while keeping its full-year financial outlook intact.
The stock GE, -1.24% was little changed, down 0.1% in midday trading, but that trailed the 2.4% surge in the SPDR Industrial Select Sector exchange-traded fund XLI, +2.76% and the S&P 500 index’s SPX, +2.72% 2.3% rally. The stock has lost 17% since it closed at a 19-month high of $13.16 on Feb. 12.
“We’re clearly in a fluid volatile point in time. But as is in prior periods, this too shall pass, in our view.”
In GE’s presentation to investors regarding its 2020 outlook, the industrial conglomerate said it estimates that the coronavirus outbreak will negatively impact first-quarter industrial free cash flow (FCF) by $300 million to $500 million and operating income by $200 million to $300 million. That sets GE up to report first-quarter FCF of negative $2 billion and adjusted earnings per share of 10 cents, which is below the FactSet consensus of 13 cents.
Although Chief Executive Larry Culp stressed in a conference call with analysts that GE’s operations in China were “large,” and that “what we don’t know outweighs what we do know at this point in time,” the 2020 FCF guidance range of positive $2 billion go $4 billion was kept intact.
“It’s a volatile fluid situation, unpredictable in many respects,” Culp said, according to a FactSet transcript.
He said GE had 18,000 employees in China, or about 9% of the total workforce of 200,000, with 2,000 workers in the Hubei province, where the novel coronavirus was first detected in December. Most of the employees went back to work in February, but the sites there are operating at reduced capacity.
For GE’s aviation business alone, David Joyce, the CEO of that business segment, said the COVID-19 impact on FCF was estimated to be a negative $200 million to $300 million. He also stressed that “no one knows how this will play out over the year,” but said underlying fundamentals remain strong.
For 2020, GE expects organic Aviation revenue growth in the “low-single digits” percentage range and FCF “flat to up.” The FactSet consensus for aviation revenue of $33.63 billion implies 2.3% growth.
Analyst Robert Stallard at Vertical Research Partners was a bit skeptical of that revenue guidance.
“While none of us have a crystal ball on the impact on COVID-19, our suspicion is that GE may have been a bit optimistic with its aviation revenue forecast for 2020,” Stallard wrote in a note to clients. “[I]f we see airlines hunkering down because of coronavirus then there could be spares destocking, deferred maintenance and increased old aircraft retirements.”
Regarding the impact of the 737 MAX groundings, Joyce said an agreement was reached with Boeing Co. BA, -0.21% on payment terms for production deliveries in 2020, and the engines delivered in 2019 that are on “parked” aircraft. Culp said because of that agreement, working capital will be a “significant positive” in 2020.
Joyce added that the excess capacity for building the LEAP engines used in the MAX aircraft will result in a hiring freeze, reduced capital expenditures and a restructuring of capacity, but didn’t provide more details.
If that wasn’t enough, GE also addressed concerns about pension obligations. Culp said $4 billion to $5 billion will be contributed to the U.S. pension, which he believes will meet the estimated “minimum risk” of funding requirements, through at least 2022.
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But that expectation could certainly change, given the uncertain interest rate environment, highlighted by the Federal Reserve’s surprise 50 basis point rate cut on Tuesday, and recent record lows in Treasury yield.
Culp said every 25 basis point in the discount rate with respect to the pension generates about $2.3 billion of obligation.
Analyst John Inch at Gordon Haskett asked whether GE would need to look for new sources of liquidity, once the proceeds from the sale of the biopharma business (about $20 billion) are used up, given the impact of the Fed’s rate cuts and since the drop in Baker Hughes Co.’s stock price has reduced the balance of GE’s holdings by about $3 billion.
Culp said: “[I] would say the short answer to the question is no, at least not at this time.” Read more about how Baker Hughes’s stock affects GE.
“We’re clearly in a fluid volatile point in time,” Culp said. “But as is in prior periods, this too shall pass, in our view.”