You Can’t Bet Against Larry Culp and Win

In late 2018 we published a report entitled “In Culp We Trust.” Despite difficult times for GE GE then, which saw the firm remove guidance for several months, our faith in Culp’s leadership has been rewarded. The market’s assessment of GE’s valuation now has exceeded our DCF-derived fair value estimate of $12 per share and has met our sum-of-the-parts value of $12.60. GE’s full-year 2019 results exceeded our expectations for revenue ($95.2 billion versus $93.0 billion expected), adjusted EPS ($0.65 versus $0.62 expected), and well past industrial free cash flow ($2.3 billion versus $300 million expected).

While we could likely see some upside to our fair value estimate as we review our model with the issuance of GE’s 10-K filing, we maintain our valuation for now as GE’s 2020 outlook is in line with our expectations for revenue, adjusted EPS, and industrial free cash flow.

We remain concerned about the 737 MAX’s return to service in mid-2020 (according to Boeing) given GE Aviation’s outsize impact on our valuation. However, given that LEAP provides GE with a negative margin headwind during ramp, this could be a source of cash offset by working capital effects. That said, we remain impressed with GE’s industrial free cash flow for the year despite a $1.4 billion headwind from the 737 MAX and the headwind from renewable energy as GE moves through the PTC, cycle. What’s most impressive about the $2.3 billion in full industrial free cash flow is that adding back the $1.4 billion cash headwind nearly equals GE’s 2019 industrial cash flow of $4.5 billion, which saw benefits to free cash from renewables. (Albeit, as we wrote in our earnings note from the third quarter, there are a lot of puts and takes as a significant chunk of the MAX headwinds are minimized by the timing of the discount reimbursements to airline carriers, while LEAP deliveries offset some benefits to cash).

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