GE takes tumble as earnings favor bottom of forecast

Richard Clough 7/21/2017

NEW YORK (Bloomberg) -- General Electric Co. said it’s trending toward the bottom end of its profit forecast this year as the manufacturer faces ongoing challenges in the oil and gas market.

Shares plunged in pre-market trading after the company said it’s facing hurdles in the resources markets. The company’s power business and its oil and gas unit showed an “unusual degree of margin weakness” in the second quarter, Morgan Stanley analyst Nigel Coe said in a note to clients.

The results mark a disappointing end to Jeffrey Immelt’s tumultuous 16-year tenure as CEO, a period in which GE trailed the broader stock market. Under pressure from activist investor Trian Fund Management, the Boston-based manufacturer agreed to deepen cost cuts as it contends with feeble demand in some markets and low oil prices.

This year’s earnings are likely to be near the bottom of the company’s forecast of $1.60 to $1.70 a share, CFO Jeff Bornstein said on a conference call with analysts.

The shares tumbled 3.8% to $25.68 before the start of regular trading in New York. The shares plunged 16% this year through Thursday, while the Standard & Poor’s 500 Index climbed 10%.

Cash focus

Industrial operating cash flow rose to $1.5 billion in the second quarter, GE said Friday in a statement. Immelt had promised the metric would rebound after a surprise plunge during the first three months of the year rattled shareholders in the maker of jet engines, gas turbines and medical scanners. But the company still needs a “huge” second half to achieve full-year targets, said Gautam Khanna, an analyst at Cowen & Co.

John Flannery, a GE veteran who will take over after Immelt steps down at the end of the month, has said he will make cash flow a focus when he takes the helm on Aug. 1. GE set off alarm bells after reporting negative $1.6 billion in industrial operating cash flows in the first quarter, as working capital increased. That was about $1 billion worse than the company had anticipated.

Second-quarter adjusted earnings fell to 28 cents a share. That exceeded the 25 cent average of analysts’ estimates compiled by Bloomberg. Sales declined 12% to $29.6 billion, compared with $29.2 billion expected by analysts.

Revenue climbed 5% in GE Power, the world’s largest maker of gas turbines. At GE Aviation, which is boosting production on a new jet engine, it was little changed.

Sales slid 3% in the oil and gas unit, which has struggled amid the plunge and sluggish recovery of crude prices. GE this month closed a deal to combine the division with Baker Hughes, a move to broaden product offerings and help the companies capitalize on an eventual rebound. GE owns 62.5% of the new entity.

reshaping portfolio

Immelt has been reshaping the portfolio and tightening operations amid pressure from Trian. The firm co-founded by Nelson Peltz took a stake in GE in 2015 after Immelt unveiled a plan to shed financial businesses and tilt the company toward equipment manufacturing.

Immelt last month revealed plans to step down after nearly 16 years as CEO. He will stay chairman until the end of the year.

Despite becoming one of the world’s best-known CEOs, Immelt failed to win the accolades that Wall Street bestowed on his predecessor, Jack Welch. The shares have fallen by almost one-third since Immelt took the helm. He faced criticism for cutting the dividend in 2009 and paying too much for some acquisitions, and he also built up the oil and gas division just before crude prices plummeted.

In preparation for the CEO transition, Flannery has been on a “listening tour” to meet with investors, customers, employees and government officials. He plans to provide an update in mid-November to detail his plans for the portfolio, cost cutting and the 2018 outlook.

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