GE Surges as Culp Predicts Positive Cash Flow in Second Half
Comment of the Day

September 17 2020

Commentary by Eoin Treacy

GE Surges as Culp Predicts Positive Cash Flow in Second Half

This article by Ryan Beene for Bloomberg may be of interest to subscribers. Here is a section:

Key markets are stabilizing and GE is making “good progress” in cutting costs by $2 billion and saving $3 billion in cash to contend with the coronavirus pandemic, Culp said. While the recovery will be gradual, results are improving and GE is poised for continued cash-flow gains through the end of the year, he

“I sit here today feeling very confident about where we are and where we’re going despite all of the trials and tribulations that Covid has certainly thrown at us,” Culp said at a Morgan Stanley conference Wednesday.

The CEO’s optimistic tone marks a turnabout from late July, when he stopped short of saying GE would generate free cash flow in the second half. The pandemic has prompted an unprecedented collapse in air travel, gutting demand for the company’s jet engines and crimping sales of other products such as gas turbines and medical equipment.

Eoin Treacy's view

Manufacturers of big pieces of equipment that require teams of people to operate were hit hard by COVID-19. However, a number had been trending lower for a long time before pandemic hit and rationalisation plans were already well underway. There is no doubt that the ill effects of the lockdown are non-trivial but valuations are much improved and a return to profitability is likely to be rewarded by investors.

General Electric had been on the cusp of recovery ahead of the pandemic but collapsed as lockdowns set in. It made a new low as recently as March and is still trading in the region of the lows over the last 20 months. This week’s upward dynamics confirm lows of at least near-term significance.

3M has been trending lower since early 2018 and is another example of an industrial where intangible valuations on the balance sheet have been challenged by investors. The share is now testing the sequence of lower rally highs and a sustained move below $150 would be required to question medium-term scope for additional upside.

The Chemours Co broke its downtrend in August and hit a new recovery high today. As a speciality chemicals company it is best known for the Teflon brand but it also offers exposure to gold and oil processing.

Rolls Royce has not yet been able to demonstrate it can hold a sustainable floor to the share price. News this week the company is looking at issuing new equity and debt raised dilution risk for existing investors and the share took another leg lower. The challenges the company face are significant but are also likely to be transitory. When air travel recovers the outlook for the business will improve significantly.

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