The Wall Street Journal - 31.10.2019

B12|Thursday, October 31, 2019 THEWALL STREET JOURNAL.**

GE Still Has Much to Prove

Shares surged after the conglomerate’s latest results, but the market’s trust won’t be won back so easily

Sometimesthe most appropriate

thing to do is to say you aren’t go-

ing to act appropriately anymore.

So it was with Federal Reserve

officials who, at the conclusion of

their policy-setting meeting

Wednesday, announced that they

were lowering their target range on

overnight interest rates by a quar-

ter point for the third time this

year.

It was what they didn’t say that

matters most, though: The phrase

that the Fed “will act as appropriate

to sustain the expansion” didn’t

make it into the postmeeting state-

ment after featuring in the three

previous ones. In its place, the

statement said the Fed “will con-

tinue to monitor the implications of

incoming information for the eco-

nomic outlook as it assesses the ap-

propriate path of the target range

for the federal-funds rate.”

The sentence switch is directed

at investors who had come to see

“act as appropriate” as a signal of a

forthcoming cut. The new language

suggests the Fed will likely leave

rates on hold at its final meeting of

the year in December, but that a

pause isn’t a certainty.

The aim is twofold: First, the Fed

doesn’t want markets to price in

the likelihood of a cut. When that

happens, it is difficult to avoid cut-

ting without upsetting markets, and

thus exacerbating all the uncertain-

ties that have beset businesses

lately. But it doesn’t want to be

seen as shutting the door on an-

other rate cut either because that

also could cause a ruckus in the

market.

So far, so good. Both the stock

and Treasury markets took the Fed

meeting in stride. Interest-rate fu-

tures on Wednesday afternoon put

the chances of a December rate cut

at around 20%—about what they

had at the end of the day Tuesday.

The real key to December will be

whether the labor market and con-

sumer spending continue to hold up

despite all worries businesses have

been having.

It is time to watch what the

economy does, not what the Fed

says. —Justin Lahart

Fed’s Shift

In Wording

Speaks

Volumes

Central bank leaves

itself plenty of room

AT&T was between a rock and a

hard place with its much-awaited

entry into the TV streaming wars.

It chose the hard place.

The telecommunications giant

unveiled the details of its HBO

Max streaming service late Tues-

day. Set to launch in May, it will

effectively bundle HBO’s existing

programming with other new and

legacy media properties the com-

pany either owns or has acquired

the rights to.

That ranges from existing TV ti-

tles, such as “Friends” and “South

Park” to new shows that will be

exclusive to the offering. The com-

pany will charge $14.99 a month

for the service—equal to the cur-

rent cost of its stand-alone HBO

Now app but above almost every

other streaming service save for

the most expensive tier of Netflix.

That price is a big gamble. Ad-

free streaming services, such as

those from Netflix and Hulu ,have

long gotten by on monthly fees

closer to $10. Meanwhile, Apple

Inc. and Walt Disney are about to

launch their own streaming ser-

vices for even less.

Disney’s aggressive pricing is

particularly notable. Its $6.99

monthly fee will grant viewers ac-

cess to one of Hollywood’s most

desirable libraries of content, in-

cluding the “Star Wars” and Mar-

vel franchises along with new,

original shows based on those

properties.

AT&T now has a sizable library

of its own, thanks to its acquisi-

tion of Time Warner. But the com-

pany still didn’t have a lot of great

options here.

Chasing Disney on price could

appeal to more potential subscrib-

ers. But it would also have diluted

the value of the HBO brand that

TV viewers are long accustomed to

paying a premium for, and it

would have rankled existing sub-

scribers already paying that rate.

By keeping the price of its exist-

ing service, AT&T can effectively

enter the streaming war with a

base of 34 million U.S. subscribers,

a level that took Netflix years to

build up to.

But the price also means expan-

sion will be a challenge. AT&T has

set an ambitious goal of 50 million

U.S. subscribers by 2025, at which

point it expects the service to tip

into profitability. The company’s

pricing strategy actually serves to

highlight the poor economics of

the current streaming industry,

where intense competition be-

tween deep-pocketed payers has

jacked up content costs while lim-

iting the prices that can be

charged. This game of thrones will

be an expensive one.

—Dan Gallagher

Monthlypriceofad-free

streamingservices

Source: the companies

$0 246810121416

Netflix(premium)

HBOMax

Netflix(standard)

Hulu

YouTubePremium

CBSAllAccess

Netflix(basic)

Disney+

AppleTV+

Even a mild recession could spell trouble for a cyclical company like GE, maker of jet engines and other products.

LUKE SHARRETT/BLOOMBERG NEWS

Current

targetrange

Futures-impliedprobabilitiesofthe

Fed’sovernighttarget-raterange

followingtheDecembermeeting

Source: CME Group

80

0

20

40

60

%

1.25–1.5% 1.5–1.75%

Deutsche Bank says its restruc-

turing is on track, but investors

are clearly impatient with the

bank to start showing signs of life.

The big German lender an-

nounced plans in July to scale

back its global ambitions and refo-

cus on its core capabilities of serv-

ing European companies and some

retail-banking customers.

The first progress report came

Wednesday, as Deutsche Bank

posted a third-quarter net loss of

€832 million ($924 million), which

included a €1 billion pretax loss in

its so-called capital release unit,

where it has stored the businesses

it wants to exit. The numbers were

understandably noisy with restruc-

turing adjustments, but the bank

insists it has good momentum and

is delivering at or even ahead of

its plans. Investors remained un-

convinced, sending shares down

nearly 8%.

After restructuring, four activi-

ties are to be considered core for

Deutsche Bank: corporate banking,

private banking, asset manage-

ment and a scaled-back investment

bank. While all four areas were

profitable in the quarter, revenue

fell by 15% overall.

Management reaffirmed the re-

structuring plan and its targets. To

be convincing though, Deutsche

Bank must not only execute on

cost savings and divestitures but

also deliver revenue growth in its

core businesses.

The corporate-banking division,

a traditional strength of the Ger-

man bank, registered a 6% rise in

revenue, primarily from higher net

interest income. That is good

news, as that business must con-

tend with the prevailing low and

negative interest rates in Europe,

implications of the U.S.-China

trade tensions and a possible tech-

nical recession in Germany.

The slimmed-down investment

bank has been a focus of the re-

structuring. Revenue there was

down 5%. A 13% fall in its fixed-in-

come trading revenue caused con-

cern as this is another traditional

strength of Deutsche Bank. The

lender attributed the decline to

myriad factors including a less vol-

atile market foreign-exchange mar-

ket and the effect of the restruc-

turing in the rates and emerging-

markets debt divisions. But seeing

as many rivals logged trading

gains in the quarter, investors

have ample reason to believe that

poor execution also played a role.

The two remaining core busi-

ness areas offered more bad news.

Asset-management divisional reve-

nue fell 4%. Private banking reve-

nue declined 3%, hit by the impact

of low and negative interest rates.

While it is still early days, fall-

ing revenue has heightened con-

cerns about how well the leaner

bank can compete as it continues

to restructure.

Slimming down is one thing, but

showing that the refocused bank

can hold its own and deliver re-

turns is quite another.

—Rochelle Toplensky

AT&T Takes Streaming Video Price to the Max

OVERHEARD

Someoneexplain the con-

cept of being an economic free

rider to this man.

Visiting Saudi Arabia, Brazil-

ian President Jair Bolsonaro

said he would like his country

to join OPEC. Brazil produces

enough oil today to be a mem-

ber of the cartel—around as

much as Kuwait. It is also a big

country, though, and exports

much less than Kuwait—but

that isn’t the reason it should

think twice.

Joining a cartel comes with

obligations but few rights. On

the other hand, if leading mem-

bers like Saudi Arabia or

“OPEC+” allies such as Russia

cut back output, noncartel pro-

ducers can benefit without

sharing the cost of lost exports.

Brazil shouldn’t add the

threat of crimping its future

output because of a club it

joined. OPEC would love to

have Brazil, but the feeling

shouldn’t be mutual.

Even for a company the size of
Apple Inc., the little things can
count for a lot.
Little things, in this case, would
include the company’s projection
that revenue will grow about 4%
year over year in the quarter end-
ing in December.
Apple delivered that forecast—
slightly better than the 3% gain
Wall Street had anticipated—as
part of its fiscal fourth-quarter re-
port Wednesday afternoon. That
seemingly incremental news was
enough to bring some relief to in-
vestors who have bid up Apple’s
stock by more than 50% this year
to a historically high valuation.
Good news does tend to come in
small packages for Apple these
days. Wednesday’s results showed
another quarter of strong accelera-
tion for the company’s wearables
segment, which includes the Apple
Watch and AirPods. Revenue there
surged 54% to $6.5 billion. Growth
in service revenue accelerated to
18% from 13% in the prior quarter.
Mainly, though, Apple’s forecast
for the December quarter essen-
tially confirmed that the new
iPhone cycle—anchored by the 11
and 11 Pro models—will be a little
bit better than initially believed.
Apple has made steady progress
on weaning itself away from its
longstanding dependence on the
iconic smartphone; iPhone revenue
accounted for 55% of the com-
pany’s total revenue for the re-
cently concluded fiscal year com-
pared with 62% the year before.
But the device still has an outsize
impact on the income statement.
Analysts now expect a slight
gain in iPhone revenue for the cur-
rent fiscal year compared with
projections for a second straight
annual decline before the newest
devices launched.
Investors will have to determine
whether that is enough to justify
the stock’s recent gains. Apple’s
shares now fetch 19 times forward
earnings—their highest multiple in
nearly a decade. Next fall is ex-
pected to bring a 5G iPhone, while
the current fiscal year could be
helped by items such as new Air-
Pods—launched earlier this week—
and the new Apple TV+ streaming
service that kicks off on Friday.
Apple showed Wednesday it can
clear a low bar. Higher ones are
coming. —Dan Gallagher

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

CEO Christian Sewing

ALEX

KRAUS/BLOOMBERG NEWS

Areputation takes a long time
to build and a short time to trash,
or so the saying goes. How long
does it take to rebuild?
That is the question now for
General Electric. The conglomer-
ate’s shares surged nearly 12% fol-
lowing Wednesday’s quarterly re-
sults announcement, yet they are
back only to where they were
three months ago. The degree of
improvement in GE’s financial po-
sition, including what shareholders
learned in the latest release, is
marginal but perhaps enough to
put shares on the cheaper side of
an appropriate price range. If the
economy falters, though, the stock
would be vulnerable.
The massive selloff that GE suf-
fered during the late summer,
briefly taking the share price be-
low $8, remains telling. In mid-Au-
gust Harry Markopolos, who had
warned authorities in vain about
Bernard Madoff’s fraud, leveled
sensational claims against the con-
glomerate, making comparisons
with bankrupt Enron.
The claims had little merit and
Chief Executive Larry Culp called
them “market manipulation, pure
and simple.” But shareholders’
willingness to sell first and ask
questions later shows how difficult
it is to restore trust in what is still
a troubled and opaque company.
That is in part because GE man-
aged to maintain Wall Street’s con-
fidence for so long, even when
there were signs that something
was amiss in past decades. As far
back as the days of Jack Welch,
when GE routinely and curiously
beat quarterly forecasts by a
penny a share and briefly became
the world’s most valuable com-

pany, Wall Street asked too few

questions. His successor Jeffrey

Immelt’s postcrisis maneuvers—

notably the use of cash from a par-

ing down of its financial arm to

enable huge buybacks and the Al-

stom and Baker Hughes deals—set

the stage for the present day’s bal-

ance-sheet angst.

The arrival of Mr. Culp has done

much to restore trust, but the re-

covery has been bumpy. Maybe his

most important achievement has

been a repair of the balance sheet

to the point that another crisis of

confidence almost certainly won’t

create an existential crisis for GE.

Time heals wounds, and it also

repairs balance sheets, but the lat-

ter is happening slowly. GE said on

Wednesday that it now expects to

generate about $1 billion of free

cash flow from its industrial oper-

ations this year. That is a drop in

the bucket compared with the $9

billion in cash from disposals so

far this year and the additional

$29 billion or so of asset sales

pending through next year, but it

is a step in the right direction.

Analyst John Inch of Gordon

Haskett expects the company’s in-

debtedness to fall to 4.4 times

earnings before interest, taxes, de-

preciation and amortization at the

end of next year—a high level but

not scary. Yet this forecast as-

sumes that an economic expansion

continues. The market’s excite-

ment over a billion dollars of free

cash flow here or there must be

compared with how consequential

even a mild recession would be for

a cyclical company like GE. Has-

kett says the leverage ratio could

be as high as 6 times in such a

scenario.

That would prolong sharehold-

ers’ pain, and the possibility of a

downturn shouldn’t be discounted.

Even so, having to worry only

about normal problems like eco-

nomic cycles will come as a relief.

—Spencer Jakab

Apple Deutsche Must Do More Than Shrink

Dials Up

Relief With

Forecast