GE stock popped Tuesday after General Electric crushed earnings estimates for the second quarter, driven by its jet-engine unit. Wall Street cheered "standout" results in that business as the industrial conglomerate looks to emerge in 2024 as an aviation-focused company.
Despite the big Q2 earnings beat, General Electric merely affirmed its EPS guidance for the full year and lowered its 2022 free cash flow (FCF) outlook by $1 billion due to pressures on working capital.
"We are improving delivery, price and cost performance via lean and decentralization (strategy)," GE CEO Larry Culp said in a July 26 earnings release. "Notwithstanding this progress, much is still uncertain about the external pressures companies are facing at this moment."
Surprise GE Earnings Gain In Q2
In Q2, General Electric earnings nearly doubled to 78 cents per share. Revenue rebounded nearly 6% to $17.88 billion. Analysts were expecting EPS of 37 cents, down 6.5% year over year, and revenue of $17.457 billion.
Free cash flow came in at $162 million, defying views for a cash burn of more than $800 million. Orders grew 4%, with growth across services and equipment. Margins expanded by 380 basis points.
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Among GE's industrial segments, Q2 revenue grew 27% in aviation and 1% in health care. It fell 2% in power and sank 23% in renewable energy. The renewable energy unit was the only business segment to post a Q2 loss.
"Aerospace was a key driver of our performance this quarter as the industry recovery builds momentum," CEO Culp said in the news release. In Q2, aviation orders jumped 26%, year over year. The commercial and military jet-engine business both grew on 47% higher services demand, benefiting from higher shop visits and spare part sales. But commercial engine shipments fell, with supply disruptions hurting deliveries.
On Tuesday, GE reaffirmed tax-free spinoffs of its health care business in early 2023 and of its power business in early 2024, following which it will emerge as an aviation-focused company.
GE Maintains Outlook
General Electric reiterated that it continues to trend toward the low end of its 2022 outlook. That includes guidance for high-single-digit revenue growth (20% for aviation) and adjusted EPS of $2.80-$3.50. But GE trimmed its FCF target for $5.5 billion-$6.5 billion, now expecting that $1 billion of that cash will be pushed out beyond 2022 due to supply-chain challenges and pressures on working capital.
The 2022 EPS guidance — after a strong Q2 — implies the second half of the year will be even weaker than expected, RBC Capital Markets analyst Deane Dray wrote in a note Tuesday. "However, we believe there is an appropriate amount of conservatism baked in," he added.
Aviation was a "standout" amid broad-based top-line strength in Q2, Dray noted. He added that free cash flow was another "bright spot" and expects that the $1 billion FCF pushout will be eventually recouped.
The analyst rates GE stock at outperform, with a $94 price target.
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GE Stock Regains Key Level
Shares gapped up 4.7% to 71.55 in Tuesday's stock market trading. General Electric topped the 50-day moving average for the first time since April as it rose for the eighth consecutive day. GE stock hit 20-month lows earlier in July.
The relative strength line for GE stock is starting to tick up after a slump. A rising RS line means a stock is outperforming vs. the S&P 500.
GE Aviation Holds The Key
Like Raytheon Technologies, General Electric plans to focus on its higher-growth aviation business, leaving its storied conglomerate past behind. GE plans to complete its big breakup in early 2024.
Raytheon and 3M also reported early Tuesday. Raytheon stock fell 4.5% Tuesday after a Q2 revenue miss. 3M stock leapt 5% after a Q2 beat. Among other peers, Roper Technologies, which beat Q2 earnings views July 22, eased 0.5%.
Both GE and Raytheon make jet engines for plane makers like embattled Boeing, which landed a number of new jet orders at last week's Farnborough International Airshow. Boeing reports early Wednesday.
On July 18, GE affirmed its historic split remains on track. It also named the three public companies set to emerge in 2023-24: GE Aviation, GE HealthCare and GE Vernova (housing its power and renewable energy businesses). General Electric had first announced the breakup last fall, after years of costly restructuring efforts. Investors also fell out of love with the conglomerate business model.
Also on July 18, the industrial giant announced that Delta Air Lines and Qatar Airways had chosen its Leap-1B engines to power their Boeing 737-10 fleets.
Year to date, GE stock is down 23%. Raytheon is up 6.4%.
