It's only been a month and a half since General Electric (GE 1.65%) management gave its 2019 outlook, so it's unreasonable to expect any significant changes to its full-year expectations. Spoiler alert: There weren't any. That said, it would be wrong to think the first-quarter earnings weren't eventful and didn't spring some surprises. Let's take a look at the positives and negatives from the quarter.
The big surprise in the quarter
GE's cash flow, or rather the lack of it, is the key focus of investors right now, and the first quarter certainly produced a surprise. During the mid-March outlook meeting, CEO Larry Culp told investors that full-year industrial free cash flow would be between a negative $2 billion to zero, with the first-quarter marking the low point.
GE's renewable energy margin continues to disappoint. Image source: GE Reports.
So investors were bracing themselves for a figure significantly worse than the adjusted industrial FCF figure of negative $1.8 billion in the first quarter of 2018. However, the figure came in somewhat better than many, including management's expectations, with a decline of $1.2 billion.
The reason? Culp put it down to "largely due to timing of certain orders and customer collections we expected later in the year" and maintained the company's industrial FCF guidance for the full year -- in other words, expect some weak FCF figures in the coming quarters.
To be fair, it's nothing to get too excited about, but given the market's worries about GE's cash-flow profile, the quarter's numbers give confidence that Culp is building a solid base for future improvement in FCF.
Before digging into the segment detail, here's an overview of profit performance in the quarter.
|
Segment Profit |
Q1 2019 |
Q1 2018 |
Change |
|---|---|---|---|
|
Power |
$80 million |
$273 million |
(71%) |
|
Renewable energy |
($162 million) |
$77 million |
N/A |
|
Aviation |
$1.66 billion |
$1.60 billion |
4% |
|
Oil and gas |
$222 million |
$181 million |
23% |
|
Healthcare |
$781 million |
$735 million |
6% |
|
GE Capital |
$171 million |
($1.77 billion) |
N/A |
Data source: General Electric presentations.
GE Power performance mixed
As you can see above, the power segment didn't have a great quarter, but there is a mix of positives and negatives here.
On the negative side, management is pinning its hopes on an improvement in gas power transactional services revenue and margin in 2019 and 2020, while gas power equipment revenue is expected to be flat in the period with margins expanded.
Wolfe Research analyst Nigel Coe asked about transactional services in the quarter. Culp responded by saying that the "order book was up slightly," but "revenues were down and that was largely a function of mix." He went on to disclose that the improved pricing management was seeing in the order book needed to be seen playing "out in the margins."
Frankly, the commentary on current conditions with transactional services was slightly disappointing -- GE has been trying to improve power transactional services for more than a year -- but elsewhere in power, there were some bright spots. For example, CFO Jamie Miller noted that "some of the orders that were booked this quarter were anticipated to close later in the year" and also that "equipment orders in the quarter were margin accretive to backlog."
All told, there are signs of future improvement in transactional services and power equipment and, hopefully, they will translate into better numbers in the coming quarters.
Healthcare, renewables, and aviation
As you can see in the table above, healthcare continued its solid mid-single-digit earnings growth trajectory in the quarter, but the really interesting part comes from the strong growth in orders -- organic equipment orders were up 13% in the quarter with services up 5%. Both figures are good harbingers of future growth.
As discussed previously, margins at renewable energy (wind turbines) are under pressure, and as you can see above, segment margin was negative in the quarter. Miller talked of "some project execution issues" but said she expected "margin accretion throughout the year" -- something to look out for because renewable margin has been weak for some time.
Finally, aviation had another strong quarter, with the spares rate increasing 21% to $30.6 million per day. Segment margin was impacted by the shift in production toward LEAP engines from older CFM 56 engines (older engines tend to be higher margin because the unit cost of production tends to drop as more are produced), but this is nothing to worry about for the long term.
On a less positive note, it's far from clear what the impact of the Boeing 737 MAX production cut will be on GE -- CFM International (a joint venture between GE and Safran) produces the LEAP engine, which is the sole option on the 737 MAX, as well as one of two options on the Airbus A320 NEO. Indeed, GE's management added it as a new risk factor in its presentations.
What it means to investors
As Culp said, the quarter's results are a data point rather than a trend, but on balance, it's a positive data point, even if high-profile downside risk remains with the 737 MAX debacle. Moreover, the slight improvement in power and on cash flow needs to be backed up with more tangible results in the coming quarters. Following a miserable 2018, GE investors will be happy the company has started 2019 in line with its full-year guidance.
