As General Electric erupts after making a profit, here’s a play that impresses me

Better than bad? How about “less bad”?

General Electric (GE) released its second-quarter financial numbers Tuesday morning, and no matter how it splits, the company beat Wall Street expectations.

For the three months ended June 30, GE reported adjusted earnings of $0.78 per share on revenue of $18.646 billion. The adjusted EPS number easily beat Wall Street consensus estimates, while the revenue reading not only outperformed, but grew 2.15% from the same period a year earlier. Interestingly, GAAP’s EPS figure fell at -$0.78 (how weird), which was a huge improvement over the $1.08 loss per share from the same quarter last year.

GAAP’s profit margin was 1.3%, up 440 basis points, while the profit margin was adjusted at 9.3%, up 380 basis points, normally. Cash from operations for the period was $0.5 billion, up $0.9 billion, while free cash flow fell at $162 million, down from $199 million, but it beat expectations for extremely negative free cash flow for the period.

Spin Doctors

GE’s press release mentions the recent branding of the three independent companies that will become a subsidiary of the current company. These companies will be GE Aerospace, GE HealthCare and GE Vernova.

GE Aerospace will own the GE brand. GE Vernova will include GE’s energy companies. The company stated that it plans to file a confidential Form 10 soon, has submitted a request for a special letter ruling from the IRS, completed consultation with the European Business Council, and announced that GE HealthCare will be listed on the Nasdaq marketplace website under the symbol “GEHC.”

sector performance

GE Aerospace: Orders generated $6.918 billion (+26%), generating $6.127 billion (+27%) in revenue. A segment profit margin of 18.7% (up 1,510 basis points) generated a profit for the segment of $1.148 billion.

GE HealthCare: pReproducing orders of $4.807 billion (-1%), resulting in revenue of $4.519 billion (+1%). Segment profit margin 14.4% (down 360 basis points) generated segment profit of $651 million.

Strength: P.Reproducing $4.047 billion (-16%) orders, generating $4.202 billion (-2%) in revenue. A segment profit margin of 7.6% (up 60 basis points) generated a profit for the segment of $320 million.

Renewable energy: Orders generated $3.109 billion (-3%), generating $3.09 billion in revenue (-23%). Segment profit margin -13.5% (down 1,110 basis points) generated segment profit/loss of -419 million USD.

balance sheet

GE ended the period with net cash of $19.935 billion, which is down over six months, inventories of $17.553 billion, which increased over six months, and current assets of $60.658 billion, which is down over six months due to lower liquidity levels. Current liabilities are $53.883 billion, including $4.947 billion in short-term loans.

This leaves the company with a current ratio of 1.13, which is good. However, the current ratio is almost notably down from 1.28 six months ago. This deterioration in the quality of the “current” position of the balance sheet must be monitored.

The company’s quick ratio of 0.8 leaves something to be desired. GE is not a retailer, so quick ratios can be important, even if you understand that in times like these, companies may need to inflate inventory levels. Six months ago, GE’s fast ratio was 0.97. That’s some quick wear-and-tear there.

Total assets amount to $185.54 billion. This includes entries for “goodwill” and other intangible assets of $33.816 billion. Although there are as many as 18% of total assets, I don’t see this as being arbitrary. Total liabilities minus equity come to $149,597 billion, including $27.571 billion in long-term loans. I don’t like the liquidity to debt ratio. GE can pay its bills and service its debts right now.

My opinion is that the company needs to improve the balance sheet which has been moving in the wrong direction this year.

prospects

For the most part, GE backed its guidance for the entirety of 2022 which was first published in January – with one major exception. From the press release: “GE continues to trend toward the lower end of its 2022 forecast on all metrics except free cash flow. Working capital will come under pressure as GE shields customers from the impact of supply chain challenges, as well as related renewable energy demands, which likely Together, that drives nearly $1 billion in free cash flow into the future.”

Last month, the company directed full-year adjusted EPS toward a range of $2.80 to $3.50. Deducting nearly $1 billion from projected cash flow for this fiscal year would leave projections between $4.5 billion and $5.5 billion. At the moment, such a target seems to be too aggressive.

Larry Kolb, CEO and Chairman (and CEO of GE Aerospace) is quoted: “We are working to improve delivery, price and cost performance through decentralization and decentralization. Despite this progress, there is still a lot of uncertainty about the external pressures companies face. At the moment We are still heading towards the lower end of our forecast for 2022 on all metrics except cash, which is lower due to the timing of working capital and demand related to renewable energy We are purposefully building a stronger business as we focus on serving our customers and investing through these constraints We are moving We are on track and we are confident in our plans to form three independent companies in a position to create long-term value.”

My thoughts

The work seems to be getting better. However, these results, especially from a GAAP perspective, are not exactly what I would call desirable. If you’ve read this yet, you know that I have concerns about the direction of the balance sheet. I think the future looks bright…for GE Aerospace. What don’t you like about 18% profit margins? In addition, GE Aerospace will retain both Larry Culp and the GE brand, which can then be licensed to the other two spin-offs.

However, I don’t think I want to invest in the company as a whole. GE HealthCare appears to be a real company. Not a growing business, but a business nonetheless. As for GE Vernova? No thank you.

There was nothing in Tuesday’s report that excites me too much. However, the rest of Wall Street seems to think differently. The stock broke the downward sloping Pitchfork pattern for the first time since late mid-April and regained its 50 day simple moving average (SMA).

If stocks can hold the 50-day streak, the bulls might just have a ball game. Both the relative strength and the Daily Moving Average Convergence Divergence (MACD) appear to have extended a bit, but not enough to spoil Tuesday’s fun so far.

Personally, I’d rather go out for three weeks and sell GE August 19 at $67 for a buck than buy stock today, but that’s just me. I’ve already told you a few things that I’m not crazy about with that name.

No account options? It might be a good idea to wait and see if this arrow adds a handle to this shaping cup.

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