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Earnings Results: GE stock suffers biggest selloff in 2 years after FCF miss, downbeat outlook overshadows earnings beat

Shares of General Electric Co. tumbled Tuesday, after the industrial conglomerate’s disappointing first-quarter free cash flow and cautious full-year outlook overshadowed adjusted profit and revenue beats

The stock

dove 10.3% to $80.59, the lowest close since Nov. 23, 2020. The stock suffered the biggest one-day decline since it sank 11.3% on April 1, 2020.

GE reported before the opening bell a net loss that narrowed to $1.09 billion, or 99 cents a share, from a loss of $2.87 billion, or $2.62 a share, in the year-ago period. Excluding nonrecurring items, such as restructuring and separation costs and asset sale impairments, adjusted earnings per share rose to 24 cents from 13 cents to top the FactSet consensus of 18 cents.

Total revenue slipped 0.2% to $17.04 billion, but beat the FactSet consensus of $16.85 billion, as a 12.7% rise in sales of services was offset by a 13.9% decline in sales of equipment.

Revenue for GE’s business segments:

Aviation rose 12.2% to $5.60 billion; FactSet consensus $5.71 billion.

Healthcare grew 1.3% to $4.36 billion; FactSet consensus $4.16 billion.

Power fell 10.7% to $3.50 billion; FactSet consensus $3.79 billion.

Renewable Energy down 11.6% to $2.87 billion; FactSet consensus $3.14 billion.

Chief Executive Larry Culp said on the post-earnings conference call with analysts that supply chain issues, the Russia-Ukraine war and China COVID impacts reduced revenue by about 6 percentage points. He also said U.S. policy uncertainty led to lower Onshore Wind North American deliveries and Renewables, and continued selectivity at Power.

Free cash flow (FCF), a closely watched metric for GE, improved to negative $880 million from negative $3.36 billion a year ago, but missed the FactSet consensus of negative $816.5 million. Chief Financial Officer Carolina Happe said the year-over-year improvement in FCF resulted from lower interest expenses, derivatives on reduced debt and improvement at Aviation and Power, offset by “significant headwinds” including supply chain disruptions.

The company said it completed its annual runoff insurance statutory cash flow test, and funded $2.0 billion, which was in line with permitted practice requirements. GE expects to provide further contributions of about $3.6 billion through 2024.

GE added that it has “further advanced” plans to create three independent companies, which was announced in November 2021.

For 2022, GE maintained its guidance ranges provided in January, which included $2.80 to $3.50 for EPS and $5.5 billion to $6.5 billion from free cash flow.

Since then, CEO Culp said because GE has been experiencing “increased pressure” from inflation, Renewable Energy and the Russia-Ukraine war, results were “trending toward the low-end” of the guidance ranges.

And CFO Happe said for Aviation, which will be GE’s focus after the separations take effect, how supply chain disruptions affect the continued recovery in commercial markets will be a “key watch item” this year.

BofA Securities analyst Andrew Obin reiterated his buy rating on GE’s stock, and his $132 stock price target, but said the supply chain drag on results were more severe than previously expected.

That said, Obin continues to see upside to 2022 FCF guidance, “but acknowledge this will require some supply chain improvement.”

GE’s stock has dropped 14.7% year to date, to underperform the SPDR Industrial Select Sector exchange-traded fund’s

9.0% drop and the S&P 500 index’s

12.4% selloff.

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