Lower than Expected Revenue for GE; We Maintain our FVE

Nothing in narrow-moat-rated General Electric’s GE third-quarter results materially alters our long-term view of the firm. Therefore, we maintain our $131 fair value estimate. While third-quarter revenue came in below our expectations for the quarter, segment profit margins and adjusted EPS were both roughly in line with our expectations—in fact, the company came out marginally ahead of our EPS projection. That said, even though management had enough confidence to raise full-year adjusted EPS guidance to $1.80 at the low end of the revised range to $2.10 at high end of the revised range (from $1.20 to $2.00), we were already baking in a raise.

In fact, we slightly brought down our prior-year full-year projection to the top end of the revised range, even as we recognize that under Culp, GE traditionally guides somewhat conservatively (a prudent move, in our view, given the uncertain operating environment). Even so, working capital improvements on both the receivable and payable side have come out ahead of our expectations, and therefore our free cash flow adjustments for full-year 2021 were marginal. We now expect just over $4.7 billion of industrial free cash flow (down from just over $4.8 billion, previously).

We think the stock should have appreciated even more than it did on a lukewarm trading day for industrial stocks. While bears will certainly focus on lukewarm sales as proof of the narrative that “bulls continue to cut numbers, but maintain value,” we think this view is myopic (and frequently overstated). While we concede the latest report is a mixed print, we’re encouraged by order strength (up 42% year on year, or 21% on a sequential basis). We maintain that strong demand was clearly evident in GE’s book/bill rates.

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