General Electric (GE) is trading relatively flat today after reporting Q4 results in the pre-market. Overall, GE seems to be making steady progress on its turnaround but 2018 will be an important year.
In terms of quick background, GE is in turnaround mode. It's a global industrial conglomerate that operates in a variety of industries. Products range from aircraft engines, power generation and oil & gas production equipment to medical imaging, financing and industrial products. Its size is massive with 2017 revenue coming in at $122 bln in revenue in 2017 and nearly 300K employees.
The company has simply been performing poorly and has a bloated cost structure. It got so bad that investors, including activist investor Trian Fund Management, finally got their wish with CEO Jeff Immelt announcing in June 2017 he would step down.
Immelt's long tenure (since 2001, taking over from Jack Welch) was initially seen as a positive as the world was entering the digital age. However, Immelt's track record has been mixed at best. In fact, some have called it pretty bad and he should have been removed years ago. He let costs get out of control and made some questionable M&A decisions over the years. One of his biggest moves was having GE getting out of financial services (GE Capital), which once accounted for about half of revenue. Financials have been rebounding recently, so some question whether that was a good idea.
Also, GE made a number of questionable decisions. GE's recent $10 bln purchase of Alstom's power unit was mistimed as the coal and gas markets have weakened. In fact, its power unit has really been struggling has its utility customers have been moving more to renewable energy sources, like solar. It also recently combined oil & gas assets with Baker Hughes to create BHGE, which is majority-owned by GE. That deal is already being seen as a mistake by some. Overall, GE has seemed to make big bets on markets that are declining, to the chagrin of investors. In addition to questionable M&A, Immelt has also been criticized for bloated costs, corporate perks and private jets.
In the past year, GE's struggles have gotten worse. This has led to the ouster of Immelt, its CFO Jeff Bornstein and several top executives. The new CEO is John Flannery and one of the first things he's doing is slashing costs. He has grounded GE's corporate jets and GE's new headquarters in Boston has been put on hold.
Some big steps were taken in November when GE slashed its dividend in half. It still pays a healthy 2.7% yield, but that will save a lot of money. Also, GE said it will decrease its board from 18 members to 12 next year and cost controls will be a bigger focus for them. GE also announced some job cuts, especially in its GE Power unit due to weak coal and gas markets. GE also said it plans some asset sales in 2018-19, including its transportation division and possibly its light bulb business. It's also considering "exit options" for Baker Hughes (BHGE), which is majority-owned by GE. These sales will follow already-departed businesses, including its NBC/Universal media units and its appliance business (sold to Haier China in 2016).
In a recent CNBC interview, Flannery says the whole company is being reviewed, from its culture to corporate spending. "Every stone turned. No sacred cows." He also said that cash flow for 2017 has been horrible but investors should not expect that to be the new normal. Cash flow has been falling for years. He said there are a number of steps GE will take in 2018 to boost cash flow. As you can see, there are a lot of changes going on at GE. Probably the biggest change is the new CEO and new management team which seems to have a much stronger focus on cutting costs.
Turning to the Q4 results, non-GAAP EPS came in at $0.27, at the low end of prior guidance. Revenue fell 5% year/year to $31.4 bln, which was below market expectations. However, cash performance was above expectations and GE says its visibility and execution on cash is improving. Aviation and Healthcare had strong performances in Q4. Power was down significantly and GE expects market challenges there to continue.
On the call this morning, GE talked about how its goal is to reshape the company. Management feels good about the progress it's making but it does have a long way to go. The backbone of a recovery is stronger execution with a focus on cash generation and a reshaping of the portfolio. GE is beginning to show progress against each of its initiatives. GE says it has a lot to work on but it also has a lot to work with as it has valuable franchises.
In Healthcare, GE noted that it introduced 26 new products in 2017. In Aviation, the company is excited about its progress in additives. GE thinks its additives potential is game changing. Co sees tremendous potential here. However, its Power segment remains challenging but the company has been reducing costs and rationalizing assets. GE is pleased with its Digital segment's performance in Q4, co sees a lot of opportunity ahead in terms of market penetration.
Overall, GE says its results this quarter demonstrate some of the early progress it is seeing from its key turnaround initiatives. The team is focused on operational execution, capital allocation and deep cost reduction to position itself for continued improvement in 2018. Cash generation has been the number one focus and results in Q4 showed more discipline. Looking ahead, there is no change to the capital plan announced in November. GE is on track to shrink its board from 18 to 12 and GE is focused on deep cost reductions.
Management sees 2018 as a critical year for GE. Clearly 2017 was a challenging year and Q4 had a lot of moving pieces. Issues in the quarter were mostly in the Power segment, which is going through a difficult period although GE did see strong results in Aviation and Healthcare in Q4. GE reaffirmed FY18 non-GAAP EPS guidance of $1.00-1.07 and it reaffirmed Industrial Free Cash Flow guidance of $6-7 bln. Also, GE will not issue debt until 2020 which is one year earlier than previously announced.
Despite the fairly good assessment on its turnaround activities, the stock did trade lower during the call when management disclosed that it's being investigated by the SEC regarding some insurance write-downs. GE is cooperating fully with the investigation which is in the early stages.