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Abu Dhabi, UAESaturday 15 December 2018

GE stock drops as profit misses forecast

General Electric has now cut its profit forecast for the full year

GE is facing hurdles such as poor cash flows and slumping power-generation markets. Richard Drew, AP
GE is facing hurdles such as poor cash flows and slumping power-generation markets. Richard Drew, AP

The revision underscores the severity of the challenges facing chief executive John Flannery, who took over Jeffrey Immelt’s longtime post in August. Facing hurdles from poor cash flows to slumping power-generation markets, GE is by far the biggest loser on the Dow Jones Industrial Average this year and has seen a quarter of its market value evaporate.

“This was a very challenging quarter,” Mr Flannery said in a statement. “While a majority of our businesses had solid earnings performance, this was offset by a decline in Power performance in a difficult market.”

The cut is the latest step in what is shaping up to be a dramatic repositioning of GE under its new leadership. Mr Flannery this month welcomed a representative of activist investor Trian Fund Management to GE’s board and announced several management changes. He is seeking deep cost cuts and has said he will consider all options, including portfolio changes.

Adjusted earnings this year are expected to be $1.05 to $1.10 a share, down from a previous range of $1.60 to $1.70 a share, GE said Friday in the statement. Analysts had anticipated $1.54 a share, according to the average of estimates compiled by Bloomberg.

The shares tumbled 5.1 per cent to $22.37 before the start of regular trading in New York.

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The maker of jet engines and gas turbines reported that adjusted profit decreased 29 cents a share for the third quarter, falling well short of the 50-cent average of analysts’ estimates compiled by Bloomberg. GE hasn’t missed estimates by more than half a cent in over nine years.

GE cut $500 million in costs during the quarter, bringing the 2017 total to $1.2 billion, which the company said is ahead of its original plans.

“This is a light-speed version of transformation,” said Nicholas Heymann, an analyst with William Blair & Co. “This is a really compressed process.”

Industrial operating cash flow, a major focus for investors, was $1.7bn in the quarter, excluding deal taxes and pension plan funding, GE said.

GE’s liquidity came under scrutiny after the company reported negative $1.6bn in industrial operating cash flow in the first quarter, about $1bn worse than the company had anticipated. The measure rebounded modestly in the second quarter.

Sales fell 3.5 per cent in GE Power, the world’s largest maker of gas turbines, as profit plummeted by more than half. GE Aviation, which is boosting production on a new jet engine, increased revenue 8.1 per cent.

Mr Flannery announced several top management changes this month, including naming a new chief financial officer. Jamie Miller, the current head of the GE Transportation unit, will assume the chief financial officer role from Jeff Bornstein in the coming weeks.

The new chief executive also became chairman this month - earlier than planned - after the surprise retirement of Mr Immelt, who had been slated to stay until year-end.

The appointment of Ed Garden, a founding partner of Trian, to GE’s board this month marked a victory for the activist firm, which had pledged to hold management accountable. Trian, co-founded by Nelson Peltz, became one of GE’s largest shareholders when it took a $2.5bn stake in 2015.

Mr Flannery will detail his plans to reshape GE at an investor meeting on November 13.

Investors are also bracing for a possible dividend cut. Though GE has said the payout remains a top priority, a dividend reduction has already been priced into the stock, Susquehanna derivative strategist Chris Jacobson said in a note.