GE's Turnaround Continues With Improved Outlook
Despite the risks posed by the 737 MAX groundings, GE maintained its long-term industrial free cash flow outlook in the quarter.
Narrow-moat-rated General Electric GE performed at the high end of run-rate expectations in the second quarter and raised its industrial free cash flow outlook at the midpoint to $0 versus a previously expected $1 billion burn. We were already modeling relatively close to this new figure and don’t plan to materially change our $12.60 fair value estimate. The new guidance further calls for full-year mid-single-digit top-line growth (up from low to mid-single digits) and reduced restructuring expenses. The main data points we were watching this quarter were industrial free cash flow, additional insights into GE's reaction to the Boeing 737 MAX groundings, and signs of fundamental improvements in GE Power. Despite the clear risks posed by the 737 MAX groundings, GE maintained its long-term industrial free cash flow outlook.
CEO Larry Culp made sure not to reveal his hand too much on the earnings call regarding the MAX groundings. The latest news we’re hearing is that Boeing plans to have the jet recertified by September, but recent comments in the press by Ryanair CEO Michael O’Leary indicate this may be delayed until October. A working capital hit from accounts receivable from Boeing delaying supplier payments is hurting free cash flow, but we’re less concerned now about the timing of these cash flows and more focused on the future of the program. Aviation currently represents a proportionately outsize contribution to GE's intrinsic value (about 60%), with the remainder mostly coming from healthcare. Even so, it is still our expectation that Boeing will fix MCAS and other software-related issues and that the aircraft will eventually be back in service. We’ll continue to monitor this item very closely.
GE also announced that CFO Jamie Miller will leave the company but will stay in place until her replacement is named.
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