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GE's Glass-Half-Full Outlook; A sobering outlook from GE on Thursday sent the shares higher as investors spotted a path to recovery for the troubled conglomerate.GE's Glass-Half-Full Outlook; A sobering outlook from GE on Thursday sent the shares higher as investors spotted a path to recovery for the troubled conglomerate.Jakab, Spencer.Wall Street Journal (Online); New York, N.Y.Do you want the bad news or the good news first? If nothing else, General Electric Chief Executive Officer Larry Culp has a keen grasp of investor psychology . A little more than a week after he let slip at a conference that industrial free cash flow at the troubled conglomerate would be negative this year, he attached specific, ugly numbers to that expectation in a Thursday morning investor update. GE shares rose sharply anyway as the glimmers of hope and specific action Mr. Culp outlined lifted spirits. Investors also might be betting that Mr. Culp understands the importance of setting a low bar for expectations. His predecessor John Flannery's short tenure was in part undone by a target for the same financial measure in 2018 that proved overly ambitious. What did we really learn about GE on Thursday, though? The details aren't alarming, but they do suggest a long slog ahead. Of most concern is the ailing power division. Blaming "legacy underwriting" and weak industry conditions, GE said it expects the division's free cash flow to remain negative at least through 2020. Despite significant projected power-generation growth, gas turbine orders industrywide fell by nearly half between 2015 and 2018 and aren't expected to recover this year or next. The company went into deeper detail about cost reductions in the power division designed to conform to this new reality. The picture in its smaller renewables division wasn't encouraging either, with margins and cash flow seen dropping this year from an anemic level despite a strong rise in revenue. GE's aviation and health-care units continue for now to be points of strength. As important as having a knack for how to deliver news, the recent share price recovery owes much to Mr. Culp's steps to convince shareholders that they aren't sitting on a ticking financial time bomb. GE Capital, home to the company's legacy insurance business that spooked investors last year, won't become profitable until 2021, and management said it will have to pump more money into it next year due to its legacy insurance portfolio. GE already said it would contribute $4 billion to GE Capital this year, not including intercompany loans. But the numbers are now merely painful rather than open-ended and potentially ruinous. GE gave a clear three-year target for reaching target leverage at GE Capital; and, crucially, it has taken big steps to raise enough cash at the parent company to forestall credit-rating issues—a whopping $38 billion from asset sales this year, for example. After a nightmarish couple of years, there really does seem to be some light at the end of the tunnel for GE's shareholders. |
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