General Electric sales top Wall Street estimates, shares rally

By Alwyn Scott and Rachit Vats

(Reuters) - General Electric (NYSE:GE) Co beat estimates for sales and cash flow in the fourth quarter and said on Thursday it had reached a tentative deal to settle a subprime mortgage case with U.S. regulators, sending its shares sharply higher.

GE stock soared nearly 15 percent to $10.45 as profits and sales rose in its aviation, healthcare and oil-and-gas businesses, offsetting nearly $1 billion in cumulative losses at its power and GE Capital units.

Many analysts and investors had braced for disappointing results and were relieved that new Chief Executive Larry Culp was able to show some improvement while being blunt about bad news.

Culp offered only a scant forecast, however, saying details would come at a meeting to be scheduled soon.

Investors were largely unfazed. "The only relevant data in the quarterly numbers is that actual sales and the free cash flow from the industrials business were better than expected," William Blair analyst Nicholas Heymann said.

GE also announced a settlement with the U.S. Department of Justice over its subprime mortgage practices before the 2008 financial crisis. GE will pay a $1.5 billion civil penalty, which it had already set aside.

On a conference call, Culp ruled out selling GE's $40-billion aircraft leasing unit, quelling concerns about jettisoning one of the few profitable parts of GE Capital.

While not providing forecasts, Culp set targets that matched what analysts and investors have been requesting: lifting GE's triple-B credit rating to single-A quality, reducing industrial debt and restoring the dividend. Culp did not set a time frame.

GE's lengthy presentation, however, contained numerous warnings and unknowns. Cash is likely to decline in 2019, but GE would not say by how much; GE is still in "early innings" of turning around its power business, where revenue will fall again in 2019; and GE will provide more detail about its toxic long-term care insurance liabilities in February, after taking a $6.2 billion charge and setting aside $15 billion to cover premium shortfalls last year.

It also did not provide more detail on ongoing regulatory investigations of its accounting for long-term care policies and power-plant services contracts.

"The results are better than expected because expectations were so low," said Erik Gordon, a professor at the University of Michigan Ross School of Business. "The company still faces the huge challenges of managing its mountain of debt and restoring investor confidence in the accuracy of its numbers."

The 2018 results cap an exceptionally bad year for GE that began with an $11 billion charge and disclosure of accounting investigations by U.S. regulators, and end with GE naming an outsider CEO keen to speed up $20 billion in asset sales and chip away at GE's massive debt.

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The 127-year-old conglomerate also was booted from the Dow Jones Industrial Average, had its credit ratings cut to three notches above junk, eliminated executive bonuses, slashed its quarterly dividend to a penny, restated earnings for the prior two years and saw a $10 billion fossil-fuel power acquisition turn sour as wind and solar power gained momentum while GE's gas-turbine business struggled with faulty turbine blades.

GE said its power unit took $400 million in charges in the fourth quarter to cover blade repairs at dozens of customers around the world and other costs.

GE booked a $666 million profit for the fourth quarter and revenue rose 5 percent to $33.3 billion, above analyst estimates of $32.6 billion, according to Refinitiv IBES.

Industrial free cash flow of $4.9 billion in the quarter, while down from last year, topped the $4 billion threshold that investors were looking to beat, Gordon Haskett analyst John Inch wrote in a note. He said GE had liquidated inventory and improved bill collection in renewables, but it was unclear whether those improvements could continue.

GE's ailing power division lost $872 million in the quarter and its GE Capital finance arm lost $177 million, it said.