Let’s review how we found ourselves where we are now through a timeline of key events shall we?
3/4/20 GE (NYSE:GE) investor day
In his prepared remarks GE Chairman & CEO Larry Culp “we expect first quarter Industrial free cash flow will be about negative $2 billion, which includes an expected impact from COVID-19 in the range of $300 million to $500 million.” This statement essentially means that the current pandemic will be responsible for between 15% and 25% of the forecasted Q1 cash drain. The relevance of this metric will be addressed in the fundamental analysis section of this article.
GE provides updates on guidance and first quarter
Apr 09, 2020
- GE withdraws financial guidance due to uncertainty associated with COVID-19
- Preliminary view of first-quarter results indicates adjusted EPS* materially below prior guidance of about $0.10; Industrial free cash flow* near the prior guidance of negative $2 billion.
The above bullet points are key metrics of the fundamental analysis section of this article.
Other substantive metrics
On 3/23/20 FlightGlobalreported that GE Aviation would reduce its US workforce by 10% and furlough 50% of MRO workers for 90 days in response to collapse of air travel demand caused by the coronavirus outbreak. For those who may not be up to speed on aviation vernacular is an acronym for maintenance, repair and overhaul . I have considered the effects of this RIF both financially and operationally in this article.
On 4/2/20 a The Wall Street Journalarticle headlined “GE to Furlough Thousands of U.S. Aviation Workers Due to Air Travel Slump “ cited increasing concerns over the coronavirus as the reason for this decision. Although GE refused to provide the numbers of employees being affected, it is believed to be ~ 2,500. I have incorporated this data into my modelling work discussed in the fundamental analysis section of this article. On 4/10/20 MarketWatch reported that S & P Global had revised GE’s credit outlook to negative citing “greater uncertainty in the pace of deleveraging amid the negative impacts on its aviation business from the COVID-19 pandemic.” This important information has been considered in the development of my analysis of GE’s projected financial ratios in this article.
Fundamental analysis of GE’s 12/31/19 audited financial statements
Statement of financial position
As a former CPA, I focus on ratio analysis in evaluating a company’s financial health. Given the current uncertainties surrounding the COVID-19 pandemic, I acknowledge there is limited value of an in-depth rigor in this regard. However the Accounting 101 dictum that “cash is king” is part of my DNA. That said, it is of note that GE’s “cash cash equivalents and restricted cash” increased from $31,124M at 12/31/18 to $36,394M at 12/31/19, which is a ~17 % increase. However, that good news was offset by a decrease in GE’s current ratio (current assets/current liabilities) to 1.6 which was a 5 year low. A “healthy” current ratio is oftentime considered to be 2 or above. I would suggest that whatever GE’s current ratio is at 3/31/20 , there is little or no chance it will improve for the foreseeable future Although the BioPharma sale to Danaher (NYSE:DHR) which was completed on 3/31/20 resulted in $20B net cash proceeds to the company, GE has pledged to the “Big Three “credit-rating agencies that these funds will help service the company’s debt. I would submit that the S & P Global downgrade was largely based on this fact. There are two significant negatives worthy of mention. GE’s total equity was $ 29,861M at 12/31/19 compared to $51,481M at 12/31/18. This decrease of $21,620M represents a precipitous decline of ~ 42% and is a “red flag” going forward. It appears to me that the company will not make any progress regarding its’ stated target of achieving a GE Industrial net debt*/EBITDA* ratio of less than 2.5x, as well as a less than 4-to-1 debt-to-equity ratio for GE Capital, in 2020.
Condensed consolidating statement of earnings (loss) and comprehensive income (loss)
In my view, the revenues and margins of GE Aviation (heretofore the company’s “crown jewel” at 3/31/20 compared to the audited 12/31/19 data can be used (at best) as an approximate guidepost regarding the overall 2020 performance of the company. It is important to keep in mind that as of 3/4/20 GE had reaffirmed their 2020 full year guidance, which means that the last month of Q1 was the most significant factor in Larry Culp’s decision to withdraw full year guidance on 4/9/20. Q2 results will provide much more insight into how 2020 is evolving.
Statement of cash flows
GE’s cash flow for the year ended 12/31/19 on a “bottom line” basis was actually quite good compared to the year ended 12/31/18 as the cash increase at 12/31/19 was $1.529M compared to a cash decrease of $9.176M at 12/31/18, which represents a difference of $10.705M. But, and this is a big but, this increase in “cash, cash equivalents and restricted cash” at 12/31/19 is substantially less than difference between the net loss for the year ended 12/31/19 of $4.912M and the net loss for the year ended 12/31/18 of $22.443M, which is $17.531M. Without further subjecting the reader to more mind-numbing numbers, suffice it to say that GE cash outflows swamped their cash inflows for the year ended 12/31/19, which is a troubling data pint. What I believe we might see -based on today’s environment- is a sizable increase in this gap in2020 which would severely impair GE’s liquidity. I intend to pay close attention to the “cash from (used for) operating activities” segment of the company’s 3/31/20 cash flow statement and subsequent reporting periods as my preferred “threat level” indicator.
As I said in my 4/9/20 blog post here titled “ 4 Reasons Why Larry Culp Should Revise GE’s 2020 Guidance the coronavirus pandemic is a prevalent “clear and present danger” that has turned the world “topsy- turvy.” The unknown time frame when COVID-19 may peak, and then level off is on every investor’s radar. The roadway sign above is a tell-tale warning against “the invisible enemy.” More specifically, the limited modeling work I’ve done using ratio analysis of GE’s audited financial statements, SEC filings, limited extrapolations of revenue, expenses and other relevant financial metrics in the preparation of this article have yielded some “line of sight” that the expected Q1 results (which will be “materially below guidance of 3/4/20 ) have a high probability of affecting Q2 et al EPS hopefully on a reduced level.
Based on the foregoing discussion and analysis, I believe that Larry Culp must be as flummoxed as Ted Striker in the iconic movie Airplane! as he is “flying on instruments” through absolutely positively no fault of his own. His mission is to navigate GE through a maze of financial and operational challenges that the whole economic system hasn’t faced since the 2008 financial crisis. Based on my expectation that GE will be operating suboptimally for a protracted period of time, GE stock will be hard-pressed not to breach its 2020 low of $6.11 on 3/23/20 by the end of Q3 on 9/30/20. As a result, I’m maintaining my conscius esse emptor (“let the buyer be very aware”) mantra of 3/12/19 for the rest of 2020.
Adh mór Mr. Culp.
Disclosure: I am/we are long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.