GE Earnings Beat Expectations. Why the Stock Dropped.

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General Electric

shares fell after the company reported better-than-expected fourth-quarter earnings and cash flow, while sales missed expectations. Management’s financial guidance for 2022 was mixed.

GE (ticker: GE) stock fell 6% Tuesday. The

S&P 500
and

Dow Jones Industrial Average
fell 1.2% and 0.2%, respectively, on another rocky day for markets.

GE reported a fourth-quarter adjusted profit of 92 cents a share and $3.8 billion in free cash flow from $20.3 billion in sales. Wall Street was looking for 84 cents in per-share earnings and $3.2 billion in free cash flow from $21.4 billion in sales.

Free cash flow from industrial operations for the full year came in at about $5.1 billion, higher than the midpoint of management guidance for about $4.3 billion.

Fourth-quarter sales were lower than expected but that’s probably not the biggest reason shares are down. Guidance for 2022 looks mixed. GE expects to earn about $3.15 a share and generate about $6 billion in free cash flow from about $80 billion in sales. Analysts are currently projecting $4 in per-share earnings and about $5.9 billion in free cash flow from $79.2 billion in sales. The per-share earnings figure looks light, even as free cash flow and sales look solid.

GE bulls likely will focus on the free cash flow number. Less bullish investors will want to understand the earnings guidance a little better. There are a lot of moving parts in the earnings guidance, not the least of which is a change to the way GE reports its financial division’s numbers. GE Capital, GE’s financing arm, is no longer reported as a separate segment. That change creates some work for Wall Street analysts who now have to include GE Capital in base estimates. Sometimes the business is excluded by Wall Street analysts who are focused on core industrial operations. With no more GE Capital, earnings forecasts will have to change a little.

The change in reporting for GE Capital reflects GE’s ongoing process of business simplification. The company has paid back about $87 billion in debt over the past three years, greatly shrinking its financing arm in the process.

Supply-chain woes and inflation are also items impacting the earnings outlook and GE is taking a conservative approach to guidance.

“We have taken a pragmatic plan to laying out 2022,” GE CEO Larry Culp told Barron’s. Inflation pressures are going to be with the company for all of 2022 and Culp isn’t going to project improvement before he sees it. “Managing inflation isn’t a skill many of us have had to exercise.”

Despite the initial stock reaction, management sounds upbeat about 2021 and the future. “2021 was an important year for the GE team, marked by significant strategic, operational, and financial progress …. exceeding our outlook,” said Culp in the company’s news release. “We’re seeing real momentum and opportunities for sustainable profitable growth from near-term improvements in GE’s businesses, especially as Aviation recovers and our end markets strengthen.”

Orders for all of 2021 rose about 12% compared with 2020. That’s some of the momentum Culp is talking about.

Coming into Tuesday trading, GE stock was up about 2.6% year to date, better than the comparable 7.5% drop of the S&P.

Write to Al Root at [email protected]