General Electric's (GE 0.82%) third-quarter earnings are out, and they are highly likely to create mixed feelings among investors. "Mixed" is the appropriate word, as there's disappointing news on the near-term outlook. On the other hand, GE did enough to make investors feel there's something in the results and outlook to underline the value case for the stock. On balance, the stock remains attractive, but near-term pressure is building. 

General Electric's third-quarter earnings

The key takeaways are as follows:

  • General Electric's free cash flow (FCF) performance was better than expected in the quarter, and management's full-year guidance for FCF of $4.5 billion, plus its assertion for FCF growth in 2023, makes the stock look like a good value. 
  • Adjusted earnings guidance lowered to $2.40-$2.80 per share, compared to a prior estimate of $2.80-$3.50.
  • GE Aerospace, the company's most significant earnings and FCF generator, is outperforming expectations in 2022.
  • GE HealthCare is underperforming expectations, a concern going into its spin-off in January.
  • GE Power's earnings were slightly disappointing, with segment margin declining to 4% compared to 5.1% due to lower power outages.
  • GE Renewable Energy's turnaround is in progress, but there will be substantive losses in 2022

General Electric's free cash flow

It's the key metric that GE investors follow, and management knows it. The figure of $1.2 billion in the quarter came much better than Wall Street analyst expectations for $289 million, and gave confidence that the company could hit its revised target of $4.5 billion in FCF in 2022. For reference, FCF through the end of the third quarter is $471 million, and it's not unusual for GE to generate $4 billion in FCF in its fourth quarter. 

That said, a cynic would argue that the only reason why GE beat market expectations is that management gave ultra-conservative guidance in mid-September -- just two weeks before the third quarter ended. 

During the Morgan Stanley Laguna conference in mid-September, CFO Carolina Dybeck Happe told investors, "We would expect free cash flow in the third quarter to be in line with the second quarter or slightly better than that," implying a figure of around $160 million.

Ultimately FCF came in $1 billion more than that figure, a result that Dybeck Happe put down to stronger revenues in cash-generative activities like aviation services and spares and better-than-expected receivables collections; an impressive turnaround in just two weeks of trading and cash collecting.

Putting skeptical thoughts aside, the guidance for a full-year FCF of $4.5 billion highlights the value case for the stock. With a market cap of $78.8 billion, GE trades on 17.5 times its estimated FCF for 2022. 

Furthermore, FCF improvement in 2023 is highly likely as aerospace continues to improve with increased flight departures and aircraft production, supply chain issues ease at aerospace and healthcare, and GE Renewable Energy is restructured. While management again fell short of confirming the previous target for $7 billion in FCF in 2023, it did say there would be an improvement, and $4.5 billion is an excellent base to build on. 

The good and bad from GE's quarter

Building on the segmental discussion in the takeaways above, it's a good idea to compare the current commentary with what management gave during its investor day outlook in March. 

The weakening outlook at GE Healthcare is unfortunate, given the spin-off in January. Still, it's hardly surprising, given ongoing supply chain pressures that have challenged the segment's ability to deliver on its backlog. Still, its orders were up 4% organically in the quarter and 4% year to date -- consistent with its outlook for mid-single-digit growth. In addition, GE Aerospace is ahead of initial expectations, while GE Power is on track, and GE Renewable Energy is in restructuring mode

Full-Year Guidance/Commentary 

Current Guidance

Investor Day Guidance (March)

GE Aerospace

Revenue growth of above 20%, with a high teens profit margin.

Organic revenue growth of more than 20%, mid-teens margin implying $3.8 billion to $4.3 billion in segment profit.

GE HealthCare

Mid-single-digit revenue growth, at least $2.6 billion in segment profit, FCF of $2.1 billion to $2.3 billion.

Low to mid-single-digit organic revenue growth, segment profit of $3.1 billion to $3.3 billion, FCF of more than $2.7 billion.

GE Power

On track for investor day guidance.

Low-single-digit revenue growth, segment profit of $1 billion to $1.2 billion, FCF of more than $1.2 billion.

GE Renewable Energy

Segment loss of $2 billion.

Low single-digit revenue growth, segment loss of $0.7 billion to $0.5 billion, FCF improvement on the outflow of $1.2 billion in 2021.

Data source: General Electric presentations.

A stock to buy?

The deteriorating outlook at GE HealthCare ahead of its spin-off is a concern, but GE's overall valuation and potential for FCF growth leave it attractively valued. It wasn't a great earnings report, but the best could be yet to come for the company.