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Why General Electric Stock Dropped After Earnings Report

By Rich Smith – Jul 29, 2020 at 3:36PM

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The earnings miss was bad enough. But now orders are down, too.

What happened

General Electric (GE -0.19%) reported earnings this morning. Then its stock dropped.

Down more than 5% initially, GE shares have recovered only a little in afternoon trading -- a 4% loss as of 3 p.m. EDT -- but things certainly could have gone worse. Instead of the $0.10 per share pro forma loss that Wall Street had predicted, GE lost $0.15 per share in the second quarter, or 50% worse than expected.  

Glowing red stock chart arrow trending down.

Image source: Getty Images.

So what

The news wasn't all bad -- revenues at least came in ahead of expectations at $17.75 billion -- but it was bad enough. GE's sales decline from last year's Q2 amounted to a 24% drop. And even the $0.15 loss GE incurred was only the pro forma number. Calculated according to generally accepted accounting principles (GAAP), the loss was nearly twice as bad -- $0.27 per share.

"Organic" industrial (i.e., non-financial) revenues dove 20%, and industrial free cash flow ran to negative $2.1 billion.  

Now what

CEO Larry Culp called it "a very challenging second quarter," and it might not get much better soon. Orders, which help us figure out whether future revenues will grow or shrink, shrank 38% in Q2, an ugly foreshadowing of things to come.

Although GE says things got a little better for it in June and July, it's predicting further deterioration in the macroeconomic environment before any recovery can arrive. Accordingly, GE is cutting costs and plans to "fully monetize" (i.e., sell) its investment in Baker Hughes over the next three years. It will need the cash because, of course, it's burning cash at present -- and Culp doesn't expect to be back generating positive free (industrial) cash flow before next year.

Judging from today's price action, not all investors are interested in waiting around to see if he succeeds.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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