General Electric (GE 1.16%) will release its third-quarter results on Oct. 25. Unfortunately, based on management's recent presentations, there's a possibility of some bad news coming. That said, investing is about buying a stock for one or two quarters, and there are plenty of reasons to stay optimistic about the stock's long-term potential. Here's the lowdown.

General Electric free-cash-flow guidance

The pressure on GE is seen in its free cash flow (FCF). It's a metric that matters because it represents what's left from earnings, working capital (cash used to run the business), and capital expenditure. As such, it can be used to decrease debt, pay dividends, initiate buybacks, and other corporate actions.

In March, management gave FCF guidance of $5.5 billion to $6.5 billion for 2022. To put those figures into context, GE's current market cap is $70.7 billion, so the midpoint of the guidance implies GE is generating 8.4% (divide $6 billion by $70.7 billion) of its market cap in FCF. In theory, at least, based on these numbers, GE could pay an 8.4% dividend yield and still grow its business. FCF matters.

Management walks back guidance

Fast forward to July's second-quarter earnings report, and management was forced to start walking back its FCF guidance. CEO Larry Culp told investors that additional working capital requirements would mean a $1 billion "push out" of FCF in 2022.

Moreover, when a Wall Street analyst (RBC's Deane Dray) asked what the push out meant for the 2023 target of $7 billion in FCF, neither Culp nor CFO Carolina Dybeck Happe explicitly reaffirmed the target. Instead, both said they expected "significant" improvement in earnings and FCF in 2023 -- hardly a surprise, given there's a push out of $1 billion in FCF from 2022.

These points are not lost on Wall Street analysts, and the new consensus for FCF in 2022 and 2023 is around $4.9 billion and $6.5 billion, respectively.

Meeting full-year expectations will be difficult

In addition, even meeting Wall Street's $4.9 billion estimate will be challenging. For example, Dybeck Happe updated investors at the Morgan Stanley Laguna conference in mid-September, telling them, "we would expect free cash flow in the third quarter to be in line with the second quarter or slightly better than that."

GE had a cash outflow of $880 million in the first quarter and then just $162 million in FCF in the second quarter, resulting in an outflow of $718 million in the first half. If third-quarter FCF performance is the same as the second quarter's $162 million, GE will finish the third quarter with a cash outflow of $556 million – it will then need to generate almost $5.5 billion in FCF in the fourth quarter. While appreciating that the fourth quarter is always GE's biggest earnings/FCF quarter and that management expects a pick up in growth as supply chain issues subside, it's still a big ask. As such, don't be surprised if GE's guidance/commentary on FCF disappoints.

Does it matter?

It's never good news when a company lowers expectations -- as GE is in danger of doing in its upcoming earnings report -- but some context is needed here. I have three points.

First, on the second-quarter earnings call, management said "two-thirds" is due to timing issues. The remaining one-third results from political uncertainty impacting renewable energy orders, notable in the U.S. onshore wind market. The "timing" issues related to increasing inventory while unable to deliver products (GE tends to manufacture high-ticket items like aircraft engines, gas turbines, medical scanners, and wind turbines) due to supply chain issues -- a situation that should rectify in the future. In other words, GE can catch up on working capital when the products are delivered later.

Second, GE's organic orders growth was 8% in the first half (29% growth in aviation, 5% in healthcare, 1% in power, and a decline of 11% in renewable energy). However, recall that GE Renewable Energy is taking deliberate action to downsize its operations, compete only in select markets, and improve the pricing of orders.

Third, GE's valuation (market cap of $70.7 billion) is so cheap that it will take a dramatic reduction in FCF expectations for 2022 and 2023 not to make GE look like an outstanding value stock.

Bottom line, don't be surprised if GE lowers its headline and implied FCF guidance for 2022 or if the new guidance still leaves the stock looking like a good value.