General Electric (GE - Get Report) shares jumped higher Monday after analyst at Citigroup said the company's recent warning on industrial free cash flow might mean its 2019 outlook is a bit clearer, even as the bank trimmed its price target on the stock following last week's sharp sell-off.
Citigroup analyst Andrew Kaplowtiz said investors need to remain "keenly focused" on GE's near-term cash headwinds after CEO Larry Culp warned that free cash flow from the conglomerate's industrial division is likely to remain negative this year. He also noted that, despite the group's admitted challenges in its power division, guidance for organic growth in the "mid-single digits" reflects solid demand and good visibility in its aviation business, steady performance from healthcare and a ramp-up in renewables.
"We think that recent actions (including the close of the sale of GE Transportation to Wabtec and the announced agreement to sell GE Healthcare's BioPharma unit to DHR for $21.4 billion) buy GE some time to execute its turnaround in a deliberate/orderly manner," Kaplowitz wrote. "That said, we think that investors remain keenly focused on both GE's near-term cash headwinds and the underlying cash generation potential of the Industrial businesses once Power is stabilized and broader restructuring actions are implemented."
GE shares were marked 3.6% higher by early afternoon trading on Wall Street to change hands at $9.92 each, a move that extends the stock's year-to-date gain to around 23.5%.
Culp told the JP Morgan Aviation, Transportation & Industrials conference in New York last week that industrial free cash flow will swing from $4.5 billion in 2018 to a negative tally this year as "market pressures impacting volume" as well as "project and execution challenges" impact its struggling power division, according to materials used in the presentation.
Culp also said margins in GE healthcare would be similar to those recorded in 2018, with organic revenue in the low to mid-single digit range.
"We are no longer willing to engage in a debate where the Bull case is that Power is "not that bad", the stock can be valued on $1+ (industrial free cash flow), and (GE Capital Services) is merely a zero," said JPMorgan analyst Stephen Tusa, who pressed Culp into revealing the gloomy cash flow forecast. "We are willing to consider that zero industrial FCF is not a sustainable level but the stock is not reflecting that as a run rate with an $85 billion market cap."
Kaplowitz, however, has a different view.
"We won't rule out the potential for some downside pressure versus even low expectations (we model roughly -8% organic growth and -3% op margin in 2019), but with GE already having disclosed an expectation that Power should be a larger cash drag in 2019 (versus ~$2.7 billion in 2018), we think that market expectations are well calibrated to reflect Power remaining a significant near-term drag on overall results," he argued.
Culp has vowed that 2019 would be a "year of change" for the struggling group, and pledged to focus on both developing GE's critical power business while reducing debt through asset sales and spin-offs.
He also said the company's dividend, which was slashed to just one penny last year amid a series of profit warnings, asset write-downs and broader investor skepticism, allowed GE to retain around $4 billion in cash but would be returned to an industry-competitive level once the balance sheet was stabilized.
"Simply put, we have too much debt and we need to reduce it thoughtfully and soon," Culp said earlier this year. "Once we put our balance sheet in a healthier place, we'll be in a better position to play offense across all our businesses."
Culp, in only a few months at helm of the struggling group, has raised more than $21 billion through the sale of GE's biopharma unit to his former company, Danaher Corp. (DHR - Get Report) , and pledged to shed the group's healthcare division and reduced its stake in Houston-based oil services group Baker Hughes (BHGE - Get Report) .