Markets

GE shares surge 11%, the most in 9 years, after a better-than-feared quarter

Key Points
  • GE reports fourth-quarter revenue of $33.3 billion, which was higher than expected.
  • The company also announces a tentative $1.5 billion settlement with the Justice Department stemming from GE's now-defunct subprime mortgage business WMC.
  • GE spun off several businesses in 2018 to generate cash and shrink its footprint.
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General Electric shares surged Thursday after the conglomerate posted better-than-expected revenue, as strong aviation results in the fourth quarter overshadowed lingering problems in the GE Capital and power businesses.

CEO Larry Culp said that industrial revenue would be up "low-to-mid single digits" in 2019. He added the company's power business sees a "flat to slightly down market" next year, which likely relieved some investors.

GE shares rose 11.7 percent on Thursday, closing above $10 a share for the first time since November. Additionally, GE's stock clinched its best day of trading since March 2009. The stock had risen as much as 18 percent in midday trading.

The company also announced a $1.5 billion settlement in principle with the Department of Justice stemming from GE's now-defunct subprime mortgage business WMC.

Here's how the company did compared with what Wall Street predicted:

  • EPS: 17 cents per share vs. 22 cents expected in an analyst survey by Refinitiv.
  • Revenue: $33.28 billion vs. $32.6 billion expected, according to the survey.

"Our strategy is clear: de-leverage our balance sheet and strengthen our businesses, starting with Power," Culp said in a statement. "We have more work to do, but I'm encouraged by the changes we're making to strengthen GE and create value."

GE's adjusted fourth-quarter earnings came in at 17 cents per share, a 60 percent decline from a year earlier. GE did not provide a forecast for full year 2019 earnings.

Industrial free cash flow was $4.5 billion for the year, GE reported. That metric has been closely watched by investors, Gordon Haskett analyst John Inch said, with $4 billion viewed "as a key threshold."

The company's struggling power business saw further year-over-year declines, with revenues falling 25 percent. GE said the power unit "was negatively impacted by continued execution and operational issues."

GE's units of aviation, health care and Baker Hughes oil and gas all saw profits rise in the fourth-quarter – although health care and Baker Hughes businesses are set be spun off. The aviation business posted revenue of $8.5 billion, a jump of 21 percent from a year earlier.

GE Capital sold off $15 billion in assets last year and paid down $21 billion in debt. The insurance portfolio ended the fourth-quarter with $124 billion of assets. GE also said it has reached a preliminary $1.5 billion settlement with the Justice Department, which was investigating GE Capital's now defunct WMC mortgage business. GE had previously set aside $1.5 billion of reserves for such a settlement.

The company did not provide an update regarding the Securities and Exchange Commission's investigation of GE's accounting practices, which focused on a $22 billion charge GE took in the third quarter related to acquisitions made in its power business. The DOJ had also widened its investigation to include that question.

GE's transportation business reported a year-over-year 18 percent decline in profit but saw revenues climb 24 percent to $1.2 billion. The business is set to complete its spin off to Wabtec in February.

GE spun off several businesses in 2018 to generate cash and shrink its footprint. The value of GE following those spinoffs has been a key point of debate among Wall Street analysts.

The shares rally came as a surprise to some analysts on Wall Street, who had been warning that GE stock may be overvalued for this earnings report.

J.P. Morgan's Stephen Tusa warned investors earlier this week that the stock may turn lower after the results. Tusa, who is widely followed for his calls on GE, has said that a level around $6 a share was the bottom. GE closed Wednesday trading at $9.10 a share.

Tusa laid out six "key questions" GE should answer this quarter, including an update to the problems facing its new turbines and guidance for headwinds in the aviation business.

Inch told clients that GE may also change the way it reports its accounting. Shifting the company's earnings presentation to generally accepted accounting principles "would be a welcome relief," Inch said, although it could "shock" the market. GE's earnings presentations have not historically included restructuring charges, which are often more than $1 billion per quarter.