GE is broken. Fixing it'll be long and challenging

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Source:   —  November 14, 2017, at 10:19 AM

Restoring Common Electric to greatness, or even just mediocrity, won't be fast or easy.

GE is broken. Fixing it'll be long and challenging

Restoring Common Electric to greatness, or even just mediocrity, won't be fast or easy.

GE's (GE) fall from grace has forced the iconic company to get drastic steps just to stop the bleeding. This week, GE slice its beloved dividend in half, and launched plans to sell off the century-old railroad business as well as at least twelve other units.

But just as it took years to running GE into the ground, there'south a growing realization interior and exterior the company'south Boston headquarters that fixing it'll be long and difficult. GE stock nosedived another seven percent on Monday, its worst day since April two thousand nine, after new CEO John Flannery detailed his turnaround vision.

Flannery warned that two thousand eighteen will be difficult, dubbing it a "reset year for us."

That'south not precisely music to the ears of GE'south long-suffering shareholders, particularly when the rest of the stock market is booming. GE shares closed at a five-and-a-half year low on Monday.

GE faces a "tough slog ahead," Cowen & Co. analyst Gautam Khanna wrote in a research report on Monday.

Scott Davis, head analyst at Melius Research, said it'south still "early days" for Flannery to "fix the GE mess he was handed."

While Davis has "high hopes," he wrote in a report that GE is facing a "debacle" and it'south "tough to have much confidence yet."

Related: GE cuts dividend for second time since Grand Depression

GE isn't just one of America'south most storied companies. It'south one of the country'south biggest employers, with nearly 300.000 workers, and one of its most widely held stocks.

Facing a serious cash crunch, GE has slice its dividend to rescue about $4 billion a year. It also plans to jettison more businesses, including the transportation div that makes trains and railroad parts. GE is even getting rid of the light bulb business that long symbolized the innovative company. And it'south thinking about relinquishing a majority stake in Baker Hughes (BHGE), which was formed when it combined with GE'south oil-and-gas assets.

Flannery has said these sales are required to oversimplify GE and refocus the company on core areas: aviation, healthcare and power.

"Complexity has damage us," the new GE CEO said.

Yet even a slimmed-down GE will still be quite complex, making everything from jet engines and MRI machines to power plants.

And it'll get time to sell off these various businesses, particularly the ones love transportation that GE admits are slumping right now. Flannery warned that the transportation div faces a "protracted slowdown in N America" due in portion to shrinking coal shipments.

Related: GE is breaking up with the light bulb

The other problem is that some of the businesses GE is keeping are in even worse shape. GE presently expects to earn just $1.00 to $1.07 per share following year. That'south roughly half the goal GE had less than a year ago.

GE warned it'll get one to two years to fix its power division, which supplies over thirty percent of the world'south energy in one hundred-fortieth countries. The business has been hit tough as utilities move far from fossil fuels in favor of renewable energy love solar and wind. GE expects a "challenging market into two thousand nineteen," which will force further cost-cutting.

"It'south a heavy lift to turn around," Flannery admitted.

Davis keep it this way: "Power is still a mess."

That mess threatens to delay efforts to fix GE'south cash crunch. Free cash flow, which measures how much cash is generated after investing in the business, has dropped for six-straight years.

GE said it expects industrial free cash flow, which includes dividends from Baker Hughes but excludes deal taxes and pension obligations, of $6 billion to $7 billion in two thousand-eighteenth.

That'south barely sufficient to cover even the lowered dividend payments.

But Cowen'south Khanna thinks GE'south "cherry-picked" definition of free cash flow has inflated its figures, making things show up better than they are. He well-known that GE is borrowing $6 billion to fund its pension obligations through two thousand twenty.

Underlying free cash flow "appears near to zero as most industrial firms would determine it," Khanna wrote.

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