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The most important clue that General Electric (NYSE:GE) will not be able to deliver on its full-year earnings and cash flow guidance may not come from GE. It comes from Germany Siemens AG (nasdaq:SIEGY). Back in August, GE's main competitor noted that margins in its electricity and gas businesses would decline in 2019. At the same time, GE management's guidance for the power division hints at a significant rise in margins – and if you can't guess that, there's nothing to guess. With that in mind, let's take a look at what Siemens' recent fourth-quarter earnings tell us about GE Power's outlook for 2019.
Under Siemens' leadership, GE will go from here In an industry where there are only a handful of leading players, it's not uncommon for two companies to have similar profit margins. In fact, a look at the recent margin performance of GE and Siemens confirms this.
As you can see below, with the exception of GE's Q4 2017 and Q3 of this year, both of which incurred significant expenses, the margins of the two companies tend to be similar. In light of this, whenSiemensManagement warned in August 2019 that its profit margins in the energy and natural gas markets will fall to low, and from mid-single-digits in 2018 finances, it questioned GE's optimism for GE's power implied guidance advantage extended to nearly 8% in the second half of 2018 adjusted power margins were positive, and the two companies recently received the most attention as a result of shownb As with GE, the charges in the quarter brought Siemens' power margins and margins down to negative territory. Siemens laid off a number of employees as part of the restructuring plan, for which the company paid 301 million euros ($343.6 million) in severance payments, while GE chief financial officer Jamie Miller said when asked about one-time charges for the quarter: "On the blade issue, GE has $240 million in warranty and repair reserves." We have seen about $400 million in project reserves and other implementation issues and about $150. Other execution issues can be forgiven by GE for the blade turbine problem, although Miller expects that "over time, there will be a similar increase in blade-related costs as we execute planned downtime in service contracts." If "other execution issues" were really one-time charges, GE, like Siemens, was on track to deliver single-digit margins in 2019 In fact, Ralf Thomas, Siemens' chief financial officer, said the adjusted power margin of 4.9% was "slightly better than expected." SiemensWhat management said Siemens' underlying results indicate that the company is likely to be profitable next year, and that new CEO Larry Culp will take immediate action to improve GE's situation. However, it is clear from Thomas's comments that the situation in the end market is not going to improve in the short term. He referred to the "recession in the power generation market" and noted that "the negative pricing impact is expected to reach around 2% to 3% of revenue as it remains stable in the short term and the generation business continues to face pricing pressures." "Kaeser - G4 - 2018 Results - Earnings - Called - Transcript? = Single part In the context of GE's report, Siemens reiterated guidance for 2019 margins in the low-single-digit electricity and gas division, stating that electricity is so important to GE that it should be seen as a positive Unfortunately, Siemens' outlook portends more problems for GE. There are two things to focus on. First, as Culp recently pointed out, one of the problems with GE in 2018 is that management has held on to GE Power's revenue outlook for too long, and that prospect is highly likely to fall off the mark. This is GM's problem, as it not only makes its 2018 coaching look untenable, but also doubts about plans to strenathen balance sheet and reduce debt levels, according to GE's most recent quarterly Securities and Exchange Commission (SEC) filing, "Market factors such as improving energy efficiency and renewable energy penetration continue to impact our long-term demand." These developments have led us to downgrade our current and future forecasts for the expected earnings and cash flows of these companies.
If that's the case, then the 2020 plan will certainly be negatively impacted – not least since Miller has previously said that "significant improvements in electricity" are an integral part of the 2020 plan. Second, the SEC's ongoing investigation involves a long-term service agreement (LTSA) with General Electric Power (GE Power). Given the United States Securities and Exchange Commission (SEC) filing, management's admission of overestimating power demand in the past, and the disconnect between GE's earnings and cash flow in recent years, the SEC may find that GE is crediting more earnings to the LTSA than it will in the future – and GE will face more charges/fines?
What's next for GE Culp recently said that GE's strength is close to bottoming out. While this is good news, it could also be a sign of more pain/charges in the fourth quarter. At the same time, the weakening of electricity has also called into question GE's 2020 plans.
Unfortunately, Siemens' recent results suggest that GE's electricity market is not going to improve anytime soon, and it's no surprise that GE is accelerating its fundraising plans. Ultimately, GE Power has a path to profitability –SiemensThis is evidenced by Siemens' earnings. It's just that GE had to go through a period of uncertainty through United States Securities and Exchange Commission (SEC) investigations, fundraising, and strategic adjustments to achieve this.
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