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GE Earnings: No Cause for Disappointment

By Adam Levine-Weinberg - Apr 29, 2021 at 7:23AM

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The conglomerate's earnings report may not look impressive at first glance, but GE continued making progress toward its ultimate goal of being a simpler and stronger company.

General Electric (GE -2.38%) stock slumped after the company released its first-quarter earnings report on Tuesday. GE's double-digit revenue decline, meager profit, and quarterly cash burn provided plenty of ammunition for skeptics to criticize the company.

Nevertheless, the industrial giant continued to make progress on its key strategic initiatives last quarter. Moreover, GE remains on track for a robust recovery beginning later this year -- and that's what really matters for long-term investors.

Pandemic-era challenges continue

In the first quarter of 2021, GE's total revenue slumped 12% to $17.1 billion. On an organic basis, revenue for its industrial businesses fell 10% to $16 billion, driven entirely by a 27% organic revenue decline in the company's aviation business.

Under generally accepted accounting principles (GAAP), General Electric recorded a subpar 2.3% industrial operating margin. Its adjusted industrial operating margin came in somewhat better at 5.1%. Even that translated to a minuscule adjusted profit of $0.03 per share, though. Two of GE's four main industrial businesses -- power and renewable energy -- lost money last quarter, showing that management still has work to do to turn those segments around.

Finally, GE's industrial operations burned $845 million of cash during the first quarter.

A GE power turbine

Image source: General Electric.

Many signs of progress

At first glance, GE's results may not seem very impressive. However, several key data points demonstrate that the industrial conglomerate's turnaround remains on track.

First, three of GE's four industrial-business segments improved their profit margins year over year on an organic basis. That includes the power and renewables units, even though both lost money. General Electric tends to produce seasonally strong results in the fourth quarter and its weakest results of the year in the first quarter, making the losses in the power and renewables segments somewhat less concerning.

Second, GE Aviation achieved a solid 12.8% segment margin despite generating only $5 billion of revenue -- down from nearly $8 billion two years earlier. That's a long way from the 20%-plus operating margins that the segment often produced prior to the COVID-19 pandemic, but it still marks a big improvement relative to the last three quarters of 2020. Management expects GE Aviation's recovery to strengthen in the second half of 2021.

A rendering of an airplane in the GECAS livery

Image source: General Electric.

Third, GE's free cash flow tends to have even more seasonal variation than its earnings, with the first quarter being weakest. Although the company did burn cash last quarter, industrial free cash flow increased by $1.7 billion year over year organically. That highlights the success of management's efforts to keep all of GE's businesses focused on cash generation.

Simpler and stronger

GE's top- and bottom-line results won't return to fully healthy levels until the aviation industry recovers from the pandemic. (Fortunately, that recovery has already begun in earnest, particularly in the U.S. and China.) However, even in the current environment, GE is getting closer to its goal of being a simpler and stronger company.

Last quarter, GE continued to use excess cash to repay debt, reducing its gross borrowings by around $4 billion. The company ended the quarter with total borrowings of $71.4 billion, down from $107.5 billion just two years earlier. It still has excess cash to repay additional debt later this year and continues to rake in cash every quarter as it sells off its stake in Baker Hughes. (GE expects to get $1 billion from selling Baker Hughes shares in the second quarter alone.)

GE's plan to sell its GECAS aircraft-leasing unit to AerCap will remove more layers of complexity from the business. Meanwhile, it will generate total proceeds of $31 billion, including at least $24 billion of cash that General Electric plans to use for additional debt repayments.

In short, General Electric's first-quarter results may not have looked impressive at first glance, but the company made steady progress toward its long-term objectives. That positions GE to garner a higher valuation once it fully recovers from the pandemic in a few years.

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