Did Gas Turbine Problems Contribute to Alstom's Profit Decline?

Friday, May 11, 2001
Markets will be keen for signs that French energy and transport company Alstom has improved margins and resolved problems with its heavy duty gas turbines when it reports full-year results on Tuesday.

According to consensus estimates provided by the JCF Group, the company is expected to post net profits of $203.4 million for its 2000/01 fiscal year - a substantial decline from the $306 million registered last year.

That decline will stem from exceptional charges for the gas turbine problems and a drop in exceptional gains from asset sales.

Comparisons will be further complicated because Alstom will be consolidating 100 percent of the former ABB Alstom Power equipment business for the final three quarters of the year.

The company agreed to buy the 50 percent of that business it did not own from ABB Ltd in March of last year for $898.7 million.

Operating profit before restructuring charges and goodwill amortization is expected to rise to $964.1 million from 729 million on sales of $20.3 billion - figures that would bring the overall operating margin to 4.7 percent, up from 4.5 percent a year earlier.

Alstom has targeted an operating margin of six percent in the 2002/2003 fiscal year. The margin in the six months to September 30, 2000 was 4.6 percent.

Profitability in the underperforming energy division, which makes up roughly half of group sales, will garner particular attention. Analysts said investors would also welcome signs the company is taking steps to reduce its debt, which rose by $165.5 million to $841 million at the end of September.

"People are keen to hear about the balance sheet and the outlook for profitability of the energy division in the current year," an analyst said. "No other stock within the European capital goods sector has a situation even remotely approaching that of Alstom in terms of off-balance sheet liabilities."

Investors will also be seeking an update on the problem turbines it inherited from ABB.

Last November, the group set a $791.1 million provision, which is to be amortized over 20 years, to cover turbine cooling system modifications required at 25 plants in the United States, South Korea, Taiwan and Europe.

"We will be looking for an update on the heavy duty gas turbine situation - whether they are still happy with the provisions they made and have agreed more settlements with clients," said an analyst at Merrill Lynch.

The turbine problems contributed to a sharp drop in Alstom's share price in the second half of 2000. But in recent months the stock has been among the top performers in France and the sector, rising over 40 percent since late January.

Analysts attribute that rise to the end of a share overhang, which had weighed on the stock in recent years. In early February, top shareholders Alcatel and Marconi placed 33 percent of Alstom's capital on the market, boosting its liquidity.

The market is doubtful, however, whether next Tuesday's earnings will provide further impetus for the shares, which are perched just below their lifetime highs at close to $29.

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