What happened
Shares of General Electric (GE 2.18%) fell 7% on Thursday, weighed down by the company's CEO warning that investors should expect negative free cash flow in 2020. The company was already facing a difficult future as the year began, and the COVID-19 pandemic is only adding to the challenges ahead.
So what
General Electric entered 2020 in the early stages of a multiyear turnaround, seeking to reverse years of share-price declines due to market-topping acquisitions and the accumulation of a huge debt burden. The industrial conglomerate is selling off numerous divisions to raise cash and pay down its debt, but the pandemic is creating new headaches in areas that were supposed to be bright spots for GE.
Image source: General Electric.
The company's massive aviation unit, which entered the year on a high and was expected to fund a restructuring of its less-successful energy operations, has been hit hard by the pandemic, which has caused airlines to retrench.
GE CEO Larry Culp, speaking at an investor conference on Thursday, said the company is cutting about 25% of its aviation workforce. GE's separate airplane finance arm is getting requests from about 85% of its customers for at least short-term deferrals as they manage through the crisis.
It all adds up to less cash coming through the door. Culp said that he expects second-quarter free cash outflow to be between $3.5 billion and $4.5 billion, significantly worse than the consensus $2.5 billion cash burn estimate. And full-year 2020 free cash flow is now also likely to be negative.
Now what
Coming into 2020, aviation looked like one of the rare bright spots in GE's portfolio. Now, it's hard to find any reason to get excited about the company in the near term.
Culp is the right person to manage a turnaround, and at current prices, GE shares are as affordable as they have been in decades. But before investors buy in, they should be warned the turnaround is likely to take years at best. In the meantime, it's hard to see what the catalyst might be to get GE shares soaring higher.
