GE Earnings: Can Fourth Quarter Results and FCF Guidance Support Stock’s Record Rally?

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Investors at General Electric Co. will soon receive some confirmation on whether the big bet they made on the industrial conglomerate’s stock over the past few months will really pay off, now and in the future. GE is scheduled to report fourth quarter results on Tuesday. January 26, before the market opens. It could be argued that this quarterly report and the management outlook for 2021 will be among the most important for investors in years as it follows a record quarterly rally in stocks.

GE’s stock, + 0.68%, had soared 73.4% during the fourth quarter, its biggest gain in a calendar quarter, according to data provided by FactSet, dating back to January 1972. That compares with a 15.0% gain in the fourth quarter. for the SPDR Industrial Select Sector XLI listed fund, -0.31% and SPX of the S&P 500 index, -0.18% 11.7% advance. To help fuel the rally, GE reported in late October a surprise adjusted third-quarter profit and positive free cash flow, as well as hopes that GE would benefit greatly from a recovery from the COVID-19 pandemic. Before GE’s third-quarter report, some analysts touted the stock as a COVID-19 vaccine stock, with UBS analyst Markus Mittermaier saying it was “the most vaccine-leveraged stock” he covered.

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FactSet, MarketWatch

GE’s aviation business appeared poised to receive a boost from a recovery in air travel, healthcare was seen as benefiting from an expected recovery in elective procedures, and an economic recovery was observed that boosted crude oil prices. , which in turn should support GE’s energy business. And President Joe Biden‘s clean energy agenda should help drive GE’s renewable energy business. Don’t Miss: GE shares jump after two Wall Street analysts raised their targets by more than 40%. Also read: GE shares rally after analysts turn bullish on growing confidence in aviation recovery. But stocks have recently stalled as new COVID-19 cases and deaths continued to rise, and the spread of the vaccines fell well short of what was expected and expected. That has given investors some reason to question whether they gambled excessively on the “vaccine-leveraged” game. See the Coronavirus Update column. GE shares rose 0.6% in late afternoon trading on Friday. It has lost 5.4% since closing at an 11-month high of $ 11.78 on January 12, while the S&P 500 has gained 1.1% during the same time. Meanwhile, UBS’s Mittermaier doubled down on his bullish call before earnings, saying GE remains one of the “best options” in 2021. He said earnings reports and GE’s outlook presentation in early March should provide catalysts. for higher profits. “With expected short-term volatility as COVID-19 containment efforts evolve, investors are increasingly looking to 2022+, and discussions are focused on energy (options on the upside, for example China and hydrogen ), renewables (offshore), equity, de-leveraging and a long-term case on aviation (cash conversion, etc.), ”Mittermaier wrote in a note to clients. “GE has shown that its balance sheet could weather the storm of the pandemic.” Here’s what Wall Street expects GE to report on earnings, revenue, and free cash flow (FCF). But as BofA Securities analyst Andrew Obin said, the management guidance for FCF in 2021 could be the key metric determining the fate of stocks. The Numbers Earnings: The average estimate of the 18 analysts surveyed by FactSet is adjusted earnings per share of 9 cents, down from 21 cents a year ago, but up from 6 cents in the third sequential quarter. Estimize, a crowdsourcing platform that collects estimates from buyer analysts, hedge fund managers, corporate executives, academics, and others, has a higher consensus EPS estimate at 11 cents. Revenue: The FactSet consensus for revenue is $ 21.77 billion. That’s less than the $ 26.24 billion a year ago, but more than the $ 19.42 billion in the third quarter. The estimated revenue consensus is also higher, at $ 22.12 billion. For GE’s business segments, the FactSet revenue consensus is $ 5.67 billion for aviation, $ 5.31 billion for energy, $ 4.75 billion for healthcare, and $ 4.44 billion for renewable energy. Free Cash Flow: In December, CEO Larry Culp said there was “line of sight of at least $ 2.5 billion of industrial free cash flow” in the fourth quarter, and he expected the FCF to be “positive” in 2021 BofA’s Obin, who rates GE at the time of purchase, estimates that management will revise its guidance to a range of about $ 1.5 billion to $ 3.5 billion. “Orientation of [$0 to $2 billion] it would be disappointing, ”Obin wrote.

FactSet

Stock movement: Since Culp was named CEO in October 2018, stocks have gained on the day earnings were reported five times, by an average of 8.5%, and fell three times, by an average of 2.5%, according to data. of FactSet. In the last 12 months, the stock has fallen 2.2%, while the industrial ETF has gained 6.9% and the S&P 500 has advanced 15.8%. Some Other Analyst Comments While GE’s renewable energy is the only segment expected to see a sequential decline in revenue, Oppenheimer’s Christopher Glynn, who rates GE outperformed, is optimistic about the business outlook. and says the offshore potential is taking shape. “GE, which is now making money from onshore wind at an ever increasing rate, is aiming for a more profitable offshore model on time,” Glynn wrote in a research note. He added that under the administration of President Joe Biden, the “political context in the United States favors incremental optimism for wind investment potential,” amid expectations of mandates and incentives favorable to renewable energy. Meanwhile, long-time GE skeptic Stephen Tusa of JP Morgan, who has a neutral rating on the stock, has a negative view of GE’s energy business, amid recent recognition from management that the trend away from fossil fuel power generation is “clear.” “In essence, GE is saying that the demand for the turbines that is the source of its $ 13 billion gas power business is at secular decline, and gas power generation / utilization, one of the drivers of its $ 8 billion service business, which is 100% + of profit, has peaked and is declining in the US. US, at least through 2022, below GE’s 2% growth forecast in investor materials last spring, “wrote Tusa.