GE braves cost inflation and confidence deflation

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The General Electric logo is pictured on working helmets during a visit at the General Electric offshore wind turbine plant in Montoir-de-Bretagne, near Saint-Nazaire, western France, November 21, 2016.

NEW YORK, April 26 (Reuters Breakingviews) - On the factory floor, General Electric (GE.N) looks very different since Larry Culp became chief executive. Its aviation plant in South Carolina, for example, now gets blades out 10 days sooner thanks to his almost religious fervor for squeezing out efficiencies. Yet one thing looks the same as when Culp started: GE’s market capitalization, which on Monday was $99 billion. He is delivering what he can, but investors seem to be losing patience with things outside of his control.

GE gave some good news on Tuesday. Earnings for the first quarter read more of $262 million were a bit better than analysts had expected, according to Refinitiv. Demand for servicing planes at its jet-engine business, the biggest part of the U.S. conglomerate, has revived as passengers retake to the skies. But at GE good news usually comes with bad, and this time it's inflation and supply chain challenges. In the aviation business, that meant difficulty getting hold of parts and labor. Culp says company-wide earnings for the full year may be at the bottom end of its previous forecast.

Each of GE's divisions is facing its own combination of unfortunate external forces. Healthcare revenue growth of 2% would have been 9% if it weren't for trouble getting hold of electronics, Covid-19-related delays to hospitals' plans to deploy GE kit, and scarce construction materials. The renewable energy business didn’t hit its potential because of, among other things, uncertainty surrounding political support for green energy incentives.

The problem is, unforeseen headwinds are becoming a constant in Culp’s time as GE’s leader, and it’s weighing on the shares, which fell more than 9% on Tuesday. GE has underperformed the S&P 500 Index since his anointment, and its total shareholder return over that time is negative where rivals like Siemens (SIEGn.DE) and Honeywell International (HON.O) are positive.

More troublingly, it looks like the value investors place on Culp’s optimism is dwindling. The GE chief reckons he can still deliver the $7 billion of free cash flow previously targeted for 2023, suggesting today's problems won't be tomorrow's. But the $10 billion fall in GE’s market value on Tuesday says otherwise. Since Culp pledged in November to split GE into three new companies read more , the stock has fallen by a quarter. Costs are going up, but confidence in GE’s turnaround is not.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- General Electric on April 26 reported adjusted earnings of $262 million for the first quarter of 2022, beating the $242 million analysts had expected according to Refinitiv, but warning that full-year profit could be at the bottom of its previously forecast range.

- Chief Executive Larry Culp told analysts that revenue, which was $16.3 billion on an adjusted basis, was 6 percentage points lower than it would have been, absent pressures from supply chain problems, the Russia-Ukraine war and China’s measures to restrain the spread of Covid-19.

- Orders for GE’s aviation business, its biggest division, increased 31% year-on-year, while revenue increased 12%. Revenue in its healthcare division increased by 1%, while GE’s power and renewables businesses both shrank, by 11% and 12% respectively.

- GE in January set out an expectation of $2.80 to $3.50 in adjusted earnings per share for 2022. Culp said on an analyst call that the company is now “trending toward the low end of that range.”

Editing by Lauren Silva Laughlin and Sharon Lam

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