Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

General Electric Co. gave investors just enough good news on Friday to buy CEO Jeff Immelt some time, but not enough to quiet the doubters.

The $261 billion industrial giant, having fallen well short of its lofty growth goals last year, had a nice surprise for investors when it reported first quarter results on Friday: 7 percent revenue gains absent the impact of currency swings and acquisitions. That's about double what GE investor Chip Pettengill of Bahl & Gaynor had said he was hoping for ahead of the results and is all the more impressive in a quarter that traditionally hasn't been GE's strongest. Earnings per share also beat estimates -- by the widest margin since 2010.

Immelt needs all the credibility boost he can get amid pressure from Trian Fund Management over a track record of overpromising and underdelivering that's sown doubts about his leadership. The latest numbers make it look like maybe he wasn't so crazy after all to aim for as much as 5 percent organic growth for the whole year. That said, one set of decent enough numbers isn't going to wipe away several quarters' worth of disappointments. This is a good start, but Immelt still has a ways to go -- and Friday's news wasn't all positive.

Color by Number
GE had a better organic growth showing and a bigger Q1 beat than Honeywell, but the latter's better guidance -- and the absence of the cash doubts that have nagged GE -- give it the win, perhaps unfairly
Source: Bloomberg

GE left its 2017 EPS guidance the same, despite its first-quarter win, whereas Honeywell International Inc., which also reported on Friday, lifted its outlook. Arguably, this just gives Immelt more room to impress later on and he has a hard enough job ahead of him without having to get aggressive on guidance raises. But the lack of improved guidance won't give investors more confidence that Immelt's on track to reach the company's much-maligned goal of $2 in EPS by 2018 (analysts are expecting $1.90). Meanwhile, GE admitted its industrial cash performance was "below expectations," giving doubters little reason to back off from hammering the company on its lagging cash conversion.

GE shares fell about about 1.2 percent in morning trading after giving up a pre-market gain. Honeywell, meanwhile, rose more than 3 percent.

Not So Fast
Optimism about GE's results faded fast in early trading
Source: Bloomberg

Let's dig more into the numbers. On the positive side, GE also reported a 7 percent organic gain in orders, powered in part by a 9 percent boost in the oil and gas business, adding to signs that a nascent recovery is underway there. That unit in particular has been a thorn in Immelt's side as he tries to boost GE's valuation by refocusing on its industrial roots.  

GE on Friday reiterated its commitments -- struck via conversations with Trian -- to wipe out $2 billion of costs over the next two years and reach $17.2 billion in industrial operating profit this year. The latter metric rose 11 percent to $3.2 billion in the quarter, with nearly all of GE's major business units beating or coming within firing range of RBC analyst Deane Dray's profit targets. An industrial segment operating margin of 13.9 percent was slightly short of his forecast. But GE said it took out about $76 million of costs in the period.

The Case of the Missing $2
Analysts have become increasingly skeptical of GE's ability to reach $2 in EPS by 2018 as the commodity downturn pressured its results
Source: Bloomberg

Then there's just that darn cash issue. Arguably, the majority of GE's shortfall relative to peers is fixable, Barclays Plc analyst Scott Davis has noted, as GE moves past headwinds associated with the launches of its H turbine and Leap jet engine and the integration its $10.6 billion acquisition of Alstom SA's power assets. Another big contributor to the shortfall is accounting rules around how GE recognizes revenue and profit margins associated with its longer-term service agreements. Davis thinks the company shouldn't be punished for these, which are typically highly profitable.

He makes some good points. But GE's results on Friday won't help win over skeptical investors to that argument nor build faith the company can still get to its goal of $12 billion to $14 billion of industrial cash flow from operating activities. For what it's worth, the company says it's still on track and will make up for the shortfall in the second and third quarters, blaming an inventory pileup in its U.S. health-care business for the disappointment (the health-care unit was likely hit by ongoing uncertainty about the fate of the Affordable Care Act).

GE is on a promising path, but the challenge for Immelt is to keep it going. He still has something to prove. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net