Analysts and investors agree on what matters most
(GE): cash flow and fixing of the division of power in difficulty. However, it is not all that matters for the long-term success of the company.
After the event for investors on Thursday, a group of analyst notes appeared, expressing opinions on the free industrial cash flow and CEO Larry Culp's ability to change his mind with GE Power. The 2019 earnings of the company – and why its earnings don't matter – are other popular topics for Wall Street analysts these days, along with debt relief.
All four issues are important to GE, but investors should not forget another big thing: spare parts and aftermarket services for the turbines, engines and medical equipment of the company. Understanding this market can help predict what the cash flow will be after completing the inventory.
UBS Analyst Peter Lennox-King keeps track of the number of times different sentences are mentioned in profit calls. It's an interesting metric that illustrates what Street is about. During GE's fourth-quarter earnings report on January 31, the word "services" did not break the first 10. "Cash flow" was the king of that call.
After the event on Thursday, the services did not come much or in the notes of the analysts. Melius Research analyst Scott Davis commented that free cash flow in the renewables business was disappointing. "[The wind business] is super competitive and lacks the potential of after-sales service to compensate for the low profile [original equipment]," he wrote. Davis thinks GE can get out of the renewable energy business.
As Davis's comment suggests, the parts and margins of service tend to be higher than the margins on the original equipment. But how much higher? Consider the aerospace supplier
(TDG), which has operating margins north of 40%. TransDigm generates most of its sales in the aviation sector, replacing the parts as they are consumed over time.
(HON), on the other hand, also has a large aerospace spare parts and services industry, and has a large original equipment franchise. Honeywell's aerospace margins are healthy by 23%, but it is very different from TransDigm levels. In Honeywell's fourth-quarter conference call, management told analysts that higher original equipment shipments were a drag on overall aerospace margins.
We can use some of this information to better understand GE's cash flow potential on its remaining industrial operations after most of the restructuring has been completed this year. Barron & # 39; s estimates that GE's remaining industrial operations could generate at least $ 6 billion in annual cash flows.
Is our number right? Probably not. But it is a useful rule of thumb. And treating the original equipment assets as the leaders of low-margin losses to forecast the future reformulates the cash generation potential of the GE service franchise. In other words, losses due to market decline are masking higher potential margins in parts and services.
No one is talking about service margins right now, but if Culp can cut fixed costs, service margins will be at the center of attention in the future.
GE was not immediately available to answer questions of Barron regarding service margins. GE shares fell 2.9% in Friday afternoon trading to $ 10.00 and up 37.4% from the start of the year.
Write to Al Root at email@example.com