Investors and investors agree on what matters
(GE): cash flow and repair of the division of power with illness. However, not everything that matters to the company's long-term success.
After the investor's event Thursday, a bevy of analyst notes emerged, opining with industrial free cash flow and CEO Larry Culp's ability to turn GE Power. The company's revenue in 2019-and why its revenue is unimportant-is another popular subject for Wall Street analysts these days, including debt cuts.
All four issues are important to GE, but investors should not forget about another big thing: aftermarket parts and services for company turbines, engines, and equipment health care. Understanding this market will help predict what cash flow will look after the turnaround is over.
UBS analyst Peter Lennox-King tracks the number of times the phrases mentioned in revenue calls. It's an interesting metric that describes what's focused on Street. During GE's fourth quarter earnings report on January 31, the word "service" did not blow the top 10. "Cash flow" was the king of that call.
After Thursday's event, services are not predominantly in analyst notes. Melius Research analyst Scott Davis commented that free cash flow in renewable businesses is disappointing. "[The wind business] is extremely competitive and there are no potential aftermarket services to recover the low profile [original equipment]," he wrote. Davis thinks, GE may come into the business of renewable-power-generation.
Davis's comments mean that parts and service margins are likely to be higher than the margins of the original equipment. But how much higher? Consider aerospace suppliers
(TDG), with operating margin north of 40%. Most of its aviation aftermarket sales creates TransDigm-replacing parts as they wear over time.
(HON), on the contrary, there is also a large portion of aerospace and business services, and it has a large franchise of the original equipment. Honeywell's aerospace margins are a healthy 23%, but that's a far cry from TransDigm levels. In the fourth quarter of Honeywell's conference call, the administrator stated that higher transmissions of original equipment were a drag on the overall aerospace margins.
We may use some of this information to get a better sense of what the potential of GE's flow in the rest of industrial assets after the bulk of the restructuring was completed this year. Barron estimates that the remaining GE's industrial assets can generate at least $ 6 billion in annual cash flows.
Is our number right? I do not think so. But this is a useful rule of thumb. And treat original equipment businesses like low margin loss leaders to estimate the future explaining the potential to deliver GE franchise money. Losses from the market's denial of power, in other words, are maximizing higher potential margins in components and services.
There is no question about service margins right now, but if Culp can reduce fixed costs, then service margins will have a future stage in the future.
GE was not immediately available to respond to Barron's questions about service margins. GE's share dropped 2.9% on Friday afternoon trading, up to $ 10.00, and up 37.4% year to date.
Write to Al Root at email@example.com