Will General Electric (GE) Disappoint this Earnings Season?


Diversified conglomerate General Electric Company (GE) is scheduled to report its first quarter 2014 results before the opening bell on April 17. In the last reported quarter, General Electric’s operating earnings were in line with the Zacks Consensus Estimate. Let’s see how things are shaping up for this announcement.

Growth Factors in the First Quarter

General Electric is realigning its corporate structure to a manufacturing-based entity with emphasis on big-ticket items, such as, medical equipment and scanners. In tune with the strategic goal to focus on its industrial manufacturing roots and reduce dependence on the financial sector to ease credit risks, General Electric had filed an initial public offering (IPO) of its North American consumer lending unit in March. The IPO is expected to be closed by late 2014. Subsequently, GE Capital Retail Finance will operate under the name “Synchrony Financial” and will trade on the New York Stock Exchange under the symbol SYF.

Post-recession, General Electric has been steadily dismantling its real estate and home loans to strengthen the balance sheet of GE Capital. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital, a measure of its balance sheet, dropped to $380 billion at year-end 2013 from $556 billion in 2008. With the divestiture of GE Capital Retail Finance, General Electric anticipates to further reduce ENI to around $300 billion.

General Electric is also exploring various options to divest its GE Money Bank unit in the Nordic region. The company expects GE Capital profit to drop to $7 billion in 2014 and to $5 billion in 2015. The company also intends to increase its earnings mix from industrial manufacturing businesses to at least 70% by 2016, up from about 55% in 2013.

Earnings Whispers

In spite of General Electric’s attempts to restructure its business, our proven model does not conclusively show that General Electric is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.

Zero Zacks ESP: Expected Surprise Prediction or ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at 0.00%. This indicates a likely in line earnings for the shares.

Zacks Rank #4 (Sell): General Electric’s Zacks Rank #4 reduces the predictive power of ESP. Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.  

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Astronics Corporation (ATRO), earnings ESP of +18.00% and Zacks Rank #1 (Strong Buy).

Convergys Corporation (CVG), earnings ESP of +13.79% and Zacks Rank #1 (Strong Buy).

Level 3 Communications, Inc. (LVLT), earnings ESP of +17.86% and Zacks Rank #1 (Strong Buy).

Read the Full Research Report on LVLT
Read the Full Research Report on ATRO
Read the Full Research Report on GE
Read the Full Research Report on CVG

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