General Electric (GE) is scheduled to report results of its third fiscal quarter before the market opens on Wednesday, October 28, with a webcast scheduled for 8:00 am ET. What to watch for:
1. OUTLOOK: When General Electric reported its Q2 results on July 29, it did not provide specific financial guidance but said it remained cautious going into the second half of the year, saying, "in no way are we suggesting that things get meaningfully easier from here." Management added that the macro environment could deteriorate further before recovering, and said they would continue to look for ways to cut costs and preserve cash.
GE chairman and CEO H. Lawrence Culp, Jr. said at the time, "We're working through a still-difficult COVID-19 environment, and while it's too early to predict the trajectory for the recovery of commercial aviation, we continue to plan for a prolonged return to prior levels of activity. Still, based on what we see today and the actions we've taken, sequential improvement in earnings and cash in the second half of the year is achievable. We expect to return to positive Industrial free cash flow in 2021. We are accelerating our transformation to make GE stronger and drive long-term, profitable growth."
On September 16, Culp, while speaking at a Morgan Stanley hosted event, said the company would see positive cash flow in the second half of 2020, and that he saw a "robust finish to 2020" for GE.
2. CEO EMPLOYMENT PACT EXTENDED: On August 18, the board of GE approved an amendment to the employment agreement of H. Lawrence Culp, Jr., GE's chairman and CEO, dated as of October 1, 2018, to extend the term of the agreement through August 2024, or such later date as mutually agreed by the parties up to and through August 17, 2025. In connection with the extension, the board also approved a one-time equity performance grant to Culp, which is intended to provide Culp with the incentive to continue to provide services to the company during the same period covered by the amended employment agreement, and reward returns to investors through stock price appreciation. In connection with this incentive grant, Culp will voluntarily relinquish any rights to his inducement PSUs, which were granted when he became CEO in 2018.
Following the announcement, BofA analyst Andrew Obin reiterated a Buy rating on GE, with an $11 price target. Management continuity is a benefit for GE shares, Obin told investors in a research note. The analyst believes GE was making progress in several areas pre-COVID and that post-COVID, the key driver of shares is how the company manages through the commercial aviation downturn. His Buy rating reflects GE's operational improvements, prospective free cash flow recovery, and "attractive valuation."
3. SEC ISSUES WELLS NOTICE: On October 6, GE disclosed that on September 30, the SEC staff issued a "Wells notice" advising the company that it is considering recommending to the SEC that it bring a civil injunctive action against GE for possible violations of the securities laws. GE has been informed that the issues the SEC staff may recommend that the SEC pursue relate to the historical premium deficiency testing for GE Capital's run-off insurance operations, as well as GE's disclosures relating to such run-off insurance operations, the company said in a regulatory filing. The staff has not made a preliminary decision whether to recommend any action with respect to the other matters under investigation, it added. The Wells notice "allows GE the opportunity to provide its perspective and to address the issues raised by the SEC staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding," GE said. The company added, "GE disagrees with the SEC staff with respect to this recommendation and will provide a response through the Wells notice process. If the SEC were to authorize an action against GE, it could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other relief within the Commission's authority. The results of the Wells notice and any enforcement action are unknown at this time."
4. JPMORGAN'S TUSA REMAINS BEARISH ON GE: On August 31, JPMorgan analyst Stephen Tusa said he was "more negative" on shares of GE and withdrew the firm's price target on the shares. GE posted a beat in Q2, but management stopped short of calling positive free cash flow in the second half, which was an "indirect way of acknowledging remaining headwinds, not an endorsement of the standing consensus V-shape that has it in solidly positive territory," Tusa noted. As a result, the analyst now expects a breakeven second half for GE versus the consensus at "solidly positive." Unlike peers, GE continues to have no official guidance, which implies difficulty seeing three to six months out, while debt maturities and options resets suggest GE does not see normal until 2024, said the analyst. Tusa added, "In other words, still no reset." The analyst sees fair value for GE below $5 per share.
On September 17, Tusa released another note on GE, saying investors who viewed General Electric's guidance yesterday for positive free cash flow in the second half of 2020 as an "inflection" misunderstand the company's business. The analyst saw no reason to change estimates following CEO Larry Culp's "vague commentary," and Tusa kept a Neutral rating on GE.
GE Aerospace
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