A month has gone by since the last earnings report for General Electric (GE). Shares have added about 3.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is GE due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
General Electric Posts Loss in Q2, Expects Improvement
General Electric reported mixed results for second-quarter 2020. Its earnings surprise was a negative 7.14%, while sales beat was 4.34%. However, both metrics fell on a year-over-year basis.
In the reported quarter, the industrial conglomerate’s bottom line plunged into losses, amounting to 15 cents per share. This was worse than the Zacks Consensus Estimate of loss of 14 cents and way below the year-ago quarter’s earnings of 16 cents per share.
The company noted that the coronavirus outbreak has taken a toll on its second-quarter results.
In the quarter under review, General Electric’s consolidated revenues were $17,750 million, reflecting a year-over-year decline of 24.2%. Weakness in Industrial and GE Capital’s performances hurt the quarterly results.
However, the company’s revenues surpassed the Zacks Consensus Estimate of $17,011 million by 4.3%.
On a segmental basis, its Industrial revenues declined 25% year over year to $16,066 million. Also, GE Capital’s revenues were down 20.5% year over year to $1,845 million.
For the Industrial segment, organic revenues in the quarter decreased 20.3% from the year-ago quarter to $16,312 million. Industrial orders declined 34.7% organically to $13.9 billion. Backlog at the end of the second quarter was at $380.5 billion.
Performance of the Industrial segment’s components business is discussed below:
Aviation revenues decreased 44% year over year to $4,384 million and orders fell 56%. Notably, second-quarter shipment of LEAP engines totaled 178, reflecting a decline of 259 from the year-ago quarter.
The segmental results, especially of the commercial aerospace business, were badly affected by the coronavirus outbreak. However, sales derived from the military-related business increased 19%.
Healthcare revenues in the reported quarter totaled $3,893 million, decreasing 21% year over year. The segment’s orders dipped 18%. On an organic basis, revenues declined 4% year over year.
Renewable Energy revenues totaled $3,505 million, down 3% year over year. Its orders declined 19% in the reported quarter. Organically, the segment’s sales inched up 1% year over year, while orders were down 17%.
The Power segment’s revenues were down 11% year over year to $4,156 million. On an organic basis, sales declined 9% organically. The segment’s orders decreased 42% or 41% organically on a year-over-year basis.
Notably, Gas Power revenues declined 5% year over year and that of the Power Portfolio was down 25%.
In the quarter under review, General Electric’s cost of sales declined 13.4% year over year to $15,083 million. It represented 85% of the quarter’s revenues versus 74.4% in the year-ago quarter. Selling, general and administrative expenses in the quarter decreased 10.1% year over year to $3,079 million. It was 17.4% of the quarter’s revenues versus 14.6% in the year-ago quarter.
The Industrial segment’s adjusted operating profit in the quarter was ($521) million against $1,812 million in the year-ago quarter. Margin in the quarter was (3.2%) versus 8.5% in the second quarter of 2019. On a reported basis, the Power segment recorded operating loss of $40 million against income of $117 million in the year-ago quarter, while Renewable Energy’s loss was $195 million compared with a loss of $184 million in second-quarter 2009. The Aviation segment’s loss was $680 million versus income of $1,385 million. The Healthcare segment’s profits declined 43% year over year.
The GE Capital segment witnessed a loss of $1,476 million compared with a loss of $89 million in the year-ago quarter.
Interest and other financial charges increased 7.3% year over year to $997 million.
Balance Sheet and Cash Flow
Exiting the second quarter of 2020, General Electric had cash and cash equivalents of $88.5 billion, down 1.2% from $89.6 billion recorded at the end of the previous quarter. Borrowings were $81.9 billion, down 3.9% from $85.2 billion at the end of the first quarter.
The company noted that it reduced Industrial debts by $7.8 billion and GE Capital debt by $1.3 billion in the year-to-date period.
Non-GAAP free cash flow for GE Industrial totaled ($2,067) million in the second quarter as compared with ($996) million in the year-ago quarter.
In June 2018, General Electric communicated plans to transform into a high-tech industrial company — focused on Aviation, Power and Renewable Energy.
In sync with its plans, the company completed the sale of its transportation business to Wabtec Corporation in the first quarter of 2019. Further, General Electric completed the divestment of the BioPharma business to Danaher Corporation in March 2020.
Further, General Electric has lost its controlling shareholding in Baker Hughes Company. In addition, the company announced a program to fully dispose of its remaining stake in Baker Hughes. These actions will be valid in the coming three years. This divestment of this non-core possession will likely help General Electric to focus on core businesses, better uses of capital, deleveraging and others.
Efforts are on track to reduce the exposure to the GE Capital business. Asset disposition has amounted to $3.1 billion in the year-to-date period.
The conglomerate’s chairman and CEO — H. Lawrence Culp, Jr. — reiterated that the workers’ safety, the continuation of providing services to customers, and preserving the business strength are its priorities during the difficult period.
For 2020, the company expects cash preservation of $3 billion and operational cash out of more than $2 billion (roughly 1/3 realized in second-quarter 2020). Also, actions to lower leverage and innovate products have been given due importance. The company expects to achieve a leverage-neutral position by 2021.
Though numbers were not provided, the company noted that its earnings and cash might reflect sequential improvement in the second half of 2020. In 2021, it anticipates Industrial free cash flow to be positive.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -117.95% due to these changes.
Currently, GE has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise GE has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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