The GE of the Future Remains an Open Question

Another General Electric Co. earnings presentation has come and gone, and we still don’t have answers to key questions around open-ended insurance liabilities or the future cash flow and structure of the company. After posting a $300 million deficit in the first nine months of the year, GE generated a greater-than-anticipated $4.9 billion in adjusted industrial free cash flow in the fourth quarter. The company was also able to cross one liability off its list of unknown horrors by announcing a $1.5 billion settlement with the U.S. Justice Department related to its WMC subprime mortgage business. That’s all fine and well, but it’s hard to contextualize those announcements in the absence of 2019 guidance and a more thorough update on whether the $15 billion GE has committed to shoring up its legacy long-term care insurance reserves will be sufficient.

Yes, the better-than-expected adjusted industrial free cash flow to close out the year creates a stronger base from which to calculate 2019 numbers, but that number is based on a cherry-picked definition that Culp’s predecessor John Flannery came up with in an attempt to satisfy investors’ demands for greater transparency. And it’s somewhat meaningless without any clarity on the cash-flow situation at GE Capital. I appreciate new CEO Larry Culp’s desire to avoid giving guidance he can’t stick to, but there was scope for him to set a very low bar, and his unwillingness to do so suggests the challenges in the power unit and GE Capital run deeper than the current share price would suggest. The pop in GE’s shares on this earnings news makes even less sense against the backdrop of the stock’s 20 percent rise leading up to earnings. That was largely on speculation about a potential sale of its GECAS jet-lessor unit at an alleged $40 billion valuation that seemed unlikely and now has been definitively ruled out by Culp.