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GE Earnings: Turnaround Progress Continues

By Adam Levine-Weinberg – Oct 30, 2021 at 9:07AM

Key Points

  • GE crushed analysts' earnings estimates in the third quarter, thanks to a big rebound in its aviation business.
  • While GE cut its full-year revenue guidance, it posted a huge jump in orders last quarter, supporting management's prediction that revenue will return to growth next year.
  • General Electric's balance sheet continues to improve rapidly.

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The industrial conglomerate posted strong earnings and cash flow last quarter, despite facing some short-term revenue headwinds.

Last Tuesday, General Electric (GE 2.58%) reported good results for the third quarter of 2021. The earnings report was far from perfect, which was no surprise, given the external headwinds GE faces today. However, the company again demonstrated the resilience of its business, hinting at its strong prospects as the economy recovers from the COVID-19 pandemic and recent supply chain disruptions.

Aviation and healthcare support a solid quarter

General Electric generated $18.4 billion of revenue in the third quarter, including industrial organic revenue of $17.6 billion. Revenue fell about 1% year over year by both measures. Supply chain problems -- particularly for healthcare equipment -- drove the revenue decline, despite high demand.

While sales slipped last quarter, GE's profitability jumped. The healthcare division maintained a solid segment margin of 16.2%, generating operating income of $704 million. Meanwhile, GE Aviation reported an impressive recovery, as a rebound in services demand boosted its segment margin to 15.7%, up from 7.1% a year earlier and 8.3% in the first half of 2021. That enabled it to book a segment profit of $846 million: more than it earned in the first two quarters combined.

A large jet engine in a test cell.

Image source: General Electric.

The strong margin performances in GE's two largest and most profitable divisions more than offset a wider loss in the renewable energy unit and a fairly modest earnings improvement for the power division. As a result, GE's adjusted industrial operating margin rose to 7.5% from 4.8% a year ago. That boosted adjusted earnings per share (EPS) 50% year over year to $0.57, crushing the analyst consensus of $0.43.

GE's cash flow was particularly impressive last quarter. Adjusted industrial free cash flow more than tripled compared to Q3 2020, reaching $1.7 billion.

The outlook improves

For the full year, General Electric raised its guidance for margin expansion by a full percentage point. That will enable it to post adjusted EPS between $1.80 and $2.10, compared to its previous guidance range of $1.20-$2.00 (adjusted for the company's recent reverse stock split).

On the flip side, GE reduced its revenue forecast. It now expects to report full-year revenue in line with last year, whereas it had previously projected low-single-digit growth. The company also narrowed its free cash flow guidance to a range of $3.75 billion to $4.75 billion but kept the midpoint of the range intact.

Investors shouldn't worry about the reduced revenue guidance, which is mainly being driven by short-term supply chain issues. Looking ahead to 2022, GE expects a return to revenue growth, along with continued margin expansion and free cash flow growth. Confirming this bullish outlook, GE's orders jumped 42% year over year last quarter, reaching $22.1 billion: well ahead of the company's revenue and roughly in line with its orders in the third quarter of 2019.

A person's hand holding an ultrasound device.

Image source: Getty Images.

Balance sheet problems continue to fade

In another good sign for shareholders, General Electric is closer than ever to fixing its balance sheet for good. It ended last quarter with $63 billion of debt, offset by $25 billion of cash.

On Monday (Nov. 1), the company will close the sale of its GECAS aircraft leasing business to AerCap, generating immediate cash proceeds of at least $24 billion. Furthermore, GE still owns about $5 billion of Baker Hughes stock, which it is monetizing at a steady pace. This will enable GE to radically reduce its debt over the next year or so.

Additionally, the GE Capital unit completed its annual insurance review last quarter, finding that portfolio performance improved again relative to its established assumptions. This reduces the risk of any nasty surprises in the future (like the $6.2 billion after-tax earnings charge announced in early 2018).

As management completes its turnaround initiatives, supply chain constraints ease, and the aviation market recovers over the next few years, GE's earnings and cash flow are set to skyrocket. The combination of strong earnings momentum and reduced balance sheet risk could ignite the next rally in GE stock.

Adam Levine-Weinberg owns shares of General Electric and is short January 2022 $120 calls on General Electric. The Motley Fool recommends AerCap Holdings. The Motley Fool has a disclosure policy.

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