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: GE sees inflation impact ‘limited’ for rest of 2021, but dealing with supply chain issues is like playing ‘whack-a-mole’

Shares of General Electric Co. rallied toward a near four-month high Tuesday, after the industrial conglomerate reported third-quarter profit and free cash flow that beat expectations, even as revenue fell below forecasts as supply chain disruptions and inflation pressure took a bite.

And while GE lowered its full-year outlook for revenue growth, it raised its guidance range for earnings and margins and narrowed its free cash flow guidance.

The stock
GE,
+2.44%

ran up as much as 5.4% before paring gains to be up 2.2% in midday trading. That put the stock on track for the highest close since July 1.

Before the opening bell, GE said it swung to net income of $1.21 billion, or $1.09 a share, from a loss of $1.19 billion, or $1.09 a share, in the same period a year ago. Excluding nonrecurring items, such as results from discontinued operations and restructuring charges, adjusted earnings per share rose to 57 cents from 38 cents, above the FactSet consensus of 43 cents.

Industrial free cash flow (FCF) more than tripled to $1.73 billion from $514 million a year ago, to mark the fourth positive reading in the past five quarters. The two analyst estimates provided to FactSet were for FCF of $670.0 million and $1.07 billion. Read more about GE’s prior FCF performance.

Total revenue declined 0.5% to $18.43 billion, below the FactSet consensus of $19.29 billion, with three of four business segments coming up short.

Regarding the supply chain disruptions, Chief Executive Larry Culp said on the post-earnings conference call with analysts that GE is “feeling the impact” in many of its businesses, with the largest impact in the Healthcare segment.

Culp said as soon as he believes he has “line of sight” into supply chain challenges, “a commodity, a supplier, a logistics provider that we thought was good for the next six weeks or the next six months” revises their outlook.

“It really is akin to playing whack-a-mole,” Culp said. “[B]y business, by commodity, by geography; it just seems like every day there’s new news to battle with.”

“Based on broader industry trends, we expect companywide pressure to continue at least into the first half of next year,” Culp said, according to a FactSet transcript.

Meanwhile, the outlook for inflation is a bit different near term, but challenges are expected to continue.

“Consistent with the broader market, we are experiencing inflation pressure, which we expect to be limited for the balance of 2021,” said Chief Financial Officer Carolina Dybeck Happe. “Next year, we anticipate a more challenging inflation environment, the most adverse impact is expected on Onshore Wind due to the rising cost of transportation and commodities, such as steel and resin, impacting the entire industry.”

She said GE is taking action in each of its businesses to mitigate inflation, such as focusing more on pricing in the commercial deals that are pursued.

CEO Culp said not only is the company “aggressively” working the more traditional cost actions, “we’re working with the supply base as feverishly as we can, both on availability and on cost.”

GE’s stock has run up 24.5% year to date, while the SPDR Industrial Select Sector exchange-traded fund
XLI,
-0.09%

has climbed 18.4% and the S&P 500 index
SPX,
+0.39%

has advanced 22.0%.

Power is the one business segment that beat on revenue

Regarding GE’s business segments, revenue from the largest Aviation business rose 10% to $5.40 billion, helped by an acceleration in air traffic as travel restrictions were lifted and vaccination rates increased, but was below the FactSet consensus of $5.59 billion.

Healthcare revenue fell 5% to $4.34 billion to miss expectations of $4.60 billion, as a “high single-digit” percentage decline in the Healthcare Systems (HCS) business more than offset strength in the Pharmaceutical Diagnostics (PDx) business.

In Renewable Energy, revenue fell 7% to $4.21 billion, below expectations of $4.66 billion, citing pressure on the Onshore Wind business from market dynamics related to the U.S. Production Tax Credit (PTC).

“[I]n Onshore Wind, the pending U.S. Production Tax Credit extension is creating uncertainty for customers and causing much less U.S. market activity in preparation for 2022,” CEO Culp said during the earnings call.

Basically, he said the “well-intended policy” is creating an “unintended consequence,” as companies are pushing out investment decisions. “In our business, given the lag between orders and revenue, the impact will continue through the fourth quarter and into 2022,” Culp said.

Meanwhile, revenue from Power, which was GE’s problem business before the COVID-19 pandemic, was essentially flat at $4.03 billion, but beat expectations of $3.82 billion, as strength in Gas Power services revenue helped offset weakness in equipment revenue.

Profit outlook raised, FCF narrowed and revenue lowered

Looking ahead, the company now expects 2021 year-over-year revenue growth to be approximately flat, compared with prior guidance of “low single-digit growth.”

However, GE raised its guidance range for adjusted EPS to $1.80 to $2.10 from $1.20 to $2.00, while narrowing its FCF guidance range to $3.75 billion to $4.75 billion from $3.5 billion to $5.0 billion. Adjusted profit margin is expected to show 350+ basis points of expansion, up from a previous estimate of 250+ basis points of expansion.

For 2022, the company expects “revenue growth, margin expansion and higher free cash flow,” and said it would provide more detail during its fourth-quarter earnings call.

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