General Electric Co. (GE) shares erased gains on Friday, July 20, as weakness in the company's power unit weighed on profit and led the company to trim its cash flow guidance.
The Boston-based industrial conglomerate reported net earnings of 7 cents a share, a 30% decline year over year. Adjusted earnings of 19 cents a share beat estimates by a penny, according to FactSet. Revenue of $30.1 billion also surpassed analysts' expectations of $29.4 billion.
Shares of GE fell 4.2% to $13.16 at 10:45 a.m. New York time. The stock had been up by as much as 2.8% before the opening bell.
"We would call this a solid yet boring quarter from GE - but given the number of blow-ups seen over the past year, boring is a welcome outcome," Deutsche Bank analyst Nicole DeBlase wrote in a July 20 research note.
Chief Executive Officer John Flannery said the company "saw continued strength across many of our segments, especially in Aviation and Healthcare." But Flannery cautioned that the power market is expected to "remain challenging."
The power unit saw a 19% decline in revenue to $7.58 billion; orders of $7.4 billion were down 26%. The company said it "continues to focus on right-sizing footprint and structural cost and maximizing the value of power's installed base." The power business deals in gas turbines and engines, water technologies and nuclear power equipment.
"Our top priority is managing through and fixing our issues in the power business," said Flannery, but noted that it will be a "multiyear fix."
Despite the challenges in power, GE maintained its full-year earnings forecast of $1 to $1.07 a share. Analysts had thought there was a chance the company may lower the upper end of its guidance. GE did, however, trim its full-year Industrial free cash flow guidance to $6 billion, compared with the previous outlook of $6 billion to $7 billion. GE also said it plans to end the year with $15 billion of cash.
"GE's revised free cash flow guidance of about $6 billion is broadly in line with our expectation for 2018, but underlines that GE is only at the outset of a multi-year effort to improve its fundamental financial performance," said Rene Lipsch, a senior credit officer at Moody's."The company has made considerable progress in executing its strategic plan and reducing structural costs, but continuing weakness in the Power segment in particular causes uncertainty in achieving the revised guidance."
J.P. Morgan's Stephen Tusa questioned how the company can maintain its EPS guidance while cutting free cash flow guidance.
"This is a sign to us of how challenged fundamentals actually are, suggesting that optics and headlines are all that is left to keep the bond vigilantes at bay," Tusa wrote in a research note. "We remain [underweight] with an $11 [price target], and the stock should be down today."
Flannery said during the quarterly conference call that analysts should expect an update on earnings later this year.
-- This story has been updated to include commentary from analysts.