UPDATE 6-GE beats on EPS, but trims cash flow target, shares fall

(Recasts top, adds detail from conference call)

July 20 (Reuters) - General Electric Co reported a smaller-than-expected drop in profit on Friday, but cut a key financial target, raising questions about its outlook for the year and sending shares sharply lower.

The 126-year-old industrial conglomerate, whose power and financial-services units are struggling, said it expects to generate perhaps $1 billion less free cash flow than expected this year.

The forecast cast doubt on GE's full-year adjusted profit target of $1.00 to $1.07 a share. Though GE affirmed that target on Friday, many analysts see it as unrealistic and had cut estimates after GE's weak first-quarter results.

"We are getting questions as to how the company can maintain EPS guidance while cutting free cash flow guidance," JPMorgan analyst Stephen Tusa wrote in a note on Friday. He expects the stock to fall on Friday as the consensus for its full-year earnings are further reduced in light of Friday's earnings report.

GE cut the industrial free cash flow target to $6 billion from a range of $6 billion to $7 billion.

Its adjusted earnings, which exclude certain pension and restructuring costs, fell 10 percent to 19 cents a share, beating analysts' expectations of 17 cents a share, according to Thomson Reuters I/B/E/S.

GE said weakness in power and renewables energy offset gains in its aviation and healthcare units.

GE revealed no new bad news about ongoing accounting investigations, a shareholder lawsuit and a federal inquiry into subprime mortgage activity, and appeared to be operating better, some analysts said.

"They didn't screw up," said Nick Heymann, analyst at William Blair, who noted the gains were limited. "This was a quarter driven entirely by aviation and healthcare."

The stock was down 4.2 percent at $13.149 in late morning trading on the New York Stock Exchange, more than erasing an earlier gain of 1 percent.

GE's earnings were above expectations in part because it cut corporate overhead costs more than analysts expected and the losses at GE Capital were less than analysts expected, said Deane Dray, analyst at RBC Capital Markets.

The reduced cash-flow target, while disappointing, came from fewer shipments of power equipment and was "not a new negative. It's just a continuation of sector-wide weakness," he said.

The results capped an unusually busy quarter in which Chief Executive John Flannery announced a long-awaited breakup plan to spin off its healthcare unit and sell its 62.5 percent stake in oil services firm Baker Hughes over the next three years.

Last month, GE was removed from the Dow Jones Industrial Average, ending more than a century on the blue-chip index.

In May, GE announced an $11.1 billion deal to merge its locomotive unit with Wabtec Corp and in June it announced a $3.25 billion sale of its distributed power unit to U.S. buyout group Advent. The unit makes industrial-sized electrical generators, which are increasingly used with solar and wind installations.

GE also restated results for 2016 and 2017 to reflect new accounting standards for long-term contracts.

Finally, GE's top executive in Latin America was jailed in Brazil after prosecutors said he was involved in a price-fixing scheme for medical equipment.

A decade and a half ago, GE was the worlds most valuable public company. But the Boston-based company foundered in several industrial markets in recent years, and its move into financial services steered it into the global financial storm in 2008.

GE shares have dropped 49 percent in the past year. Though investors are still interested in GE, many want to see the power and capital units stabilize and even improve before buying the stock, analysts have said.

Losses widened at GE Capital, the company's financing arm, to $207 million compared with a loss of $172 million a year ago.

Power unit profit fell 58 percent in the quarter, to $421 million from $994 million, as orders fell 26 percent to $7.4 billion.

GE's power unit is relying on services revenue to fuel growth and offset declining sales of new equipment. But the services business also is under attack from competitors in important markets such as Saudi Arabia.

GE's earnings from continuing operations attributable to GE shareholders fell to $736 million, or 8 cents a share, in the second quarter ended June 30, from $1.03 billion, or 12 cents a share, a year earlier. Total revenue rose to $30.1 billion from $29.1 billion.

Analysts had been looking for higher cash flow to convince them that GE can hit its adjusted free cash flow target of $6 billion to $7 billion for the year. Adjusted free cash flow from industrial activities swung to a positive $258 million in the quarter from a negative $1.7 billion in the first quarter.

(Reporting by Alwyn Scott in New York and Rachit Vats in Bengaluru Editing by Saumyadeb Chakrabarty, Nick Zieminski and Jonathan Oatis)