GE shares surge 9% after better-than-expected revenue, DOJ subprime settlement

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General Electric shares surged after strong aviation results increased revenue more than what was expected, overshadowing lingering problems in the GE Capital and power businesses.

GE also announced a $1.5 billion settlement in principle with the Department of Justice for its investigation of the now defunct subprime mortgage business WMC.

  • EPS: 17 cents a share vs. 22 cents a share expected, according to analysts surveyed by Refinitiv.
  • Revenue: $33.28 billion vs. $32.6 billion expected, according to analysts surveyed by Refinitiv.

GE shares rose 9 percent in premarket trading from Wednesday’s close of $9.10 a share.

“Our strategy is clear: de-leverage our balance sheet and strengthen our businesses, starting with Power,” GE Chairman and CEO Larry Culp said in a statement. “We have more work to do, but I’m encouraged by the changes we’re making to strengthen GE and create value.”

GE’s adjusted fourth-quarter earnings came in at 17 cents a share, a 60 percent decline from the same period last year. GE did not provide a forecast for full year 2019 earnings.

Industrial free cash flow was $4.5 billion for the year, GE reported. That metric has been closely watched by investors, Gordon Haskett analyst John Inch said, with $4 billion viewed “as a key threshold.”

The company’s struggling power business saw further year over year declines, with revenues falling 25 percent. GE said the power unit “was negatively impacted by continued execution and operational issues.”

GE’s units of aviation, healthcare and Baker Hughes oil and gas all saw profits rise in the fourth-quarter – although both the healthcare and Baker Hughes businesses are set be spun off. The aviation business posted revenue of $8.5 billion, a jump of 21 percent compared to the fourth quarter last year.

Last year GE Capital sold off $15 billion in assets and paid down $21 billion in debt. The insurance portfolio ended the fourth-quarter with $124 billion of assets. GE said it has a $1.5 billion settlement in principle with the Justice Department, which was investigating GE Capital’s now defunct WMC mortgage business. GE had previously set aside $1.5 billion of reserves for a potential legal settlement with the DOJ regarding WMC.

The company did not provide an update regarding the Securities and Exchange Commission’s investigation of GE’s accounting practices, which focused on a $22 billion charge GE took in the third quarter related to acquisitions made in its power business. The DOJ had also widened its investigation to include that charge.

GE’s transportation business reported a year-over-year 18 percent decline in profit but saw revenues climb 24 percent to $1.2 billion. The business is set to complete its spin off to Wabtec in February.

GE spun off several businesses in 2018 to generate cash and shrink its footprint. The value of GE following those spinoffs has been a key point of debate among Wall Street analysts.

The shares rally came as a surprise to some analysts on Wall Street, who had been warning that GE stock may be overvalued for this earnings report.

J.P. Morgan’s Stephen Tusa warned investors earlier this week that the stock may turn lower after the results. Tusa, who is widely followed for his calls on GE, has said that a level around $6 a share was the bottom. GE closed Wednesday trading at $9.10 a share.

Tusa laid out six “key questions” GE should answer this quarter, including an update to the problems facing its new turbines and guidance for headwinds in the aviation business.

Inch told clients that GE may also change the way it reports its accounting. Shifting the company’s earnings presentation to generally accepted accounting principles “would be a welcome relief,” Inch said, although it could “shock” the market. GE’s earnings presentations have not historically included restructuring charges, which are often more than $1 billion per quarter.

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