I'm Not Impressed With GE's Quarter: Here's What I'm Tempted to Do

It's electrifying. Or maybe not so much. Investors seem less than thrilled with General Electric (GE) on Tuesday morning in the wake of the former blue-chip conglomerate (former blue chip, still a conglomerate for now) having released its fourth quarter financial results. GE posted adjusted EPS of $0.92, which beat consensus, but also included earnings from GE's legacy insurance business and other items. Revenue generation amounted to $20.3B. That was not only a miss of what Wall Street was looking for, but also added up to a contraction of 3.5% from the year ago period. As a matter of fact, excluding all items, net earnings attributable to common shareholders came to a loss of $3.9B, down significantly from a profit of $2.442B a year ago, and $1.205B for Q3 2021.

Industrial Free Cash Flow amounted to $3.8B, which was considerably better than projected. Aviation orders came in at +22%, driven by a ramp in LEAP engine production. This product is a key component to both Boeing's (BA) 737 Max aircraft as well as the Airbus (EADSY)  A320. On the power side, equipment orders were 41% lower, resulting in a 17% reduction in order backlog. GE is expecting to be able to generate single digit revenue growth in this segment in 2022. This is not as far as we can tell based on any increase in order activity for nuclear power.

Now, the renewables business, or the wind energy business is being hit by rising inflation and has produced negative margin, driven by supply chain issues. Industrial profit margin, company-wide came to 1.1%, adjusted Industrial profit margin printed at a much more handsome 9.0%.

Guidance

GE sees adjusted full year 2022 EPS landing in a range spanning from $2.80 to $3.50, which is a good deal short of the cool $4 that Wall Street had in mind. Revenue guidance is in line with estimates, which are around $74.5B. The firm sees free cash flow hitting the $5.5B to $6.5B range in 2022, and $7B in 2023, up from $2.6B in 2021. The firm does however, acknowledge the likelihood that inflation pressures will persist into 2022, with the impact still being felt most heavily by the Onshore Wind segment.

Reminder

Investors should be cognizant that General Electric is a corporation in transition. While the firm has made a remarkable turnaround under CEO Larry Culp who has regularly sold off business units with value in order to reduce expenses and debt load.

The firm revealed plans back in November to make like a banana and split... into three units. The Healthcare segment is expected to be spun out in 2023 with Peter Arduini running the show and Culp taking the position of non-executive Chair. Energy and Power are expected to be combined and spun off in 2024 to be led by Scott Strazik. What's left over, will retain the General Electric legacy and brand name, and will be an aviation focused business. These separations are expected to cost a collective $2.5B in taxes and expenses.

My Thoughts

Needless to say, I'm not all that impressed with the quarter. I do believe in Larry Culp's leadership, and I do think that investors might want to be long this name by the time it starts splitting off these businesses next year. I believe that we have time for that. Interesting that I have not seen a single sell-side analyst upgrade, downgrade or reiterate anything this morning. No changes made to price targets either. Just crickets.

When it comes to GE, though I had toyed with being long this name prior to the reverse split, back when the risk/reward proposition was something I thought to be in the favor of shareholders, I defer to Stephen Tusa at JPMorgan. Tusa has been quiet since late November, and still has a "hold" rating on the name and a $55 price target. It's not like this is a dividend stock at this point either.

Readers will note the shares testing the lows of this past December this morning. The level also happens to be (roughly) a 38.2% Fibonacci retracement of the September 2020 through early 2021 rally. The stock traded sideways for the rest of the year after that. Yes, the stock is weak right now. No, it is not quite technically oversold just yet, which means that there could be pressure this week to crack that level if the broader market leads the way.

I am not tempted to buy this dip. However, I am tempted to sell GE February $80 puts for about $1.20. The shares are down 7.6% today. Would I be willing to take payment to expose myself to equity risk down another 11%? I might. In fact I think I will. Even if tagged in mid-February, the equity purchased would come with a net basis of $78.20.

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At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.