Will Portfolio Reshuffle Drag Q1 Earnings of New-Look GE? - Analyst Blog

The industrial goods manufacturer General Electric Company GE is scheduled to report its first-quarter 2015 results before the opening bell on Apr 17. In the last reported quarter, General Electric’s operating earnings slivered past the Zacks Consensus Estimate by a penny. Let’s see how things are shaping up for this announcement.

Key Factors in the First Quarter

General Electric is undergoing a massive restructuring in its operating portfolio in order to create a simpler and nimbler company with a re-focus on core operations. The changes at the Fairfield, CT based firm are being orchestrated by its Chairman and CEO Jeff Immelt.

In accordance with Immelt’s vision to transform the company to an industrial-focused firm, General Electric has vouched to divest most of the financial units under GE Capital over the next 24 months. The only financial operations that would be retained by the company will include the financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and will thus form an integral part of its corporate activities.   

Immelt’s current restructuring plan also involves the sale of over 4,400 properties, including warehouses, factories, malls, apartment buildings and other commercial properties of GE Capital Real Estate. The real estate assets accounted for about 7% of the aggregate GE Capital assets worth $499 billion at year-end 2014. The CEO felt that this was perhaps the most opportune time to sell these assets when the market was relatively high. The decision might also have been triggered by the Federal Reserve’s decision to raise interest rates later this year, thereby pushing up the financing costs.

The transactions will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014.

The company will record $16 billion of after-tax charges in the first quarter of 2015 in connection with the plan, $12 billion of which are non cash. The company expects that the adverse impact of the divestments would be nullified by share buybacks over the exit period. Management has authorized a new share repurchase program worth $50 billion to execute this strategy, reducing its outstanding share count to 8-8.5 billion by 2018. About $35 billion will be made available through dividend payments of GE Capital to its parent company. General Electric is likely to return over $90 billion to shareholders through dividends and share buybacks through 2018.

Earnings Whispers

Despite the best 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.

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

Zacks Rank: General Electric’s Zacks Rank #3 (Hold) when combined with 0.00% ESP reduces the predictive power of ESP. Note that stocks with a Zacks Ranks of #1 (Strong Buy), #2 (Buy) 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:

Broadcom Corp. BRCM, earnings ESP of +5.00% and Zacks Rank #1.

Popular, Inc. BPOP, earnings ESP of +9.86% and Zacks Rank #1.

Huntington Ingalls Industries, Inc. HII, earnings ESP of +2.91% and Zacks Rank #1.

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