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General Electric (GE) Earnings Preview: Will Power Segment Continue to Drag Down Profits?

Mitchell Moore

General Electric GE reported yet another round of disappointing quarterly earnings results in April, but hopes to turn things around with its Q2 financial results, which are due before the market opens on Wednesday, July 31. GE stock is up 39% YTD. Despite this climb, shares of GE have fallen 59.3% over the past 24 months, compared to its peer group’s 3.4% average climb, which consists of Honeywell HON, 3M MMM, Hitachi HTHIY, and others.

 

Overview

GE is an American multinational conglomerate that operates within aviation, healthcare, manufacturing, power and others. Last year, aviation was GE’s largest revenue generator, making up almost a quarter of full-year sales. Aviation is projected to take the crown again this year, mostly due to the strong sales of GE’s commercial jet engines.

In the first quarter of 2019, GE’s total revenues fell 1.8% over a year ago to $27.3 billion. Earnings came out even worse in Q1, with EPS down 12.5% to $0.14. This was, however, a 55.6% surprise over our Zacks Consensus Estimate of $0.09. Still, with revenues down amid tightening economic conditions, total profits were fell 11.3% from Q1 2018.

A closer look at the company’s financials reveals that most of GE’s downturn can be attributed to one division in particular, power. Two of GE’s other largest divisions, aviation and oil/gas, both grew revenues significantly from a year earlier, while its 4th largest division, healthcare, kept revenue roughly similar to Q1 2018. In 2017, GE’s water and power division generated almost $36 billion in revenue, then fell steeply to $27.3 billion in revenue for 2018. In 2019, this division is expected to generate even less, with a prediction of $22.4 billion. 

The road to a decline in the profitability of its power segment began back in 2014 when GE purchased French gas turbine company Alstom for $13 billion. This deal coincided with a global drop in the price of renewables, making gas turbines a less attractive energy source as the likes of solar became cheaper and more accessible. These struggles still plague the company. GE announced just last month that it would close a gas plant in California 20 years ahead of schedule, saying it would be “uneconomical to support further.” The company cited California’s aggressive clean energy goals as part of the decision to take the plant offline.

Renewables & Outlook

While most of GE’s current energy network does not look to be in a great spot, it is starting to invest in clean energy that will hopefully bring back stronger profitability to the segment. Two weeks ago, GE announced a partnership with BlackRock BLK to launch Distributed Solar Development. The CEO of the new company, Erik Schiemann, said that it will specialize in “the origination, development, design, execution, building, and asset management of distributed solar and storage projects.” This segment is a small fraction of GE’s renewables segment at the moment but the company believes that it has the potential to take off in the coming years.

The largest part of GE’s renewables segment is its wind turbine business. Earlier this month, GE announced the completion of certain parts for the testing of its new gigantic offshore wind turbine. The new product will stand 260 meters tall and has a capacity of 12 megawatts, enough to power roughly 16,000 households per turbine. GE has bet big that offshore wind power will become a popular choice as the world starts to transition to more renewable energy.

Since GE’s investments to turn around profitability in its power division will likely take time to payoff, earnings and revenue estimates for this quarter show negative growth. Consensus Estimates call for a 4.1% revenue decrease from the year-ago period. This decline is projected to contribute to an expected 2.7% full-year drop.

Earnings are projected to fall be even more, with a projected 36.8% decrease this quarter and a 6.15% decrease for the year. However, earnings estimates for fiscal 2020 have recently been revised upward to show a 19.4% gain over 2019.

GE’s aviation segment is expected to buffer losses from energy this year. During the Paris Airshow last month, GE Aviation and its joint venture company CFM International booked a record $55 billion in orders, mostly from its new LEAP single aisle aircraft engines. However, this gain also has to offset losses from the grounding of Boeing’s BA 737 MAX aircraft, as production halts have led to fewer engines being delivered.

Bottom Line

GE is currently a Zacks Rank #1 (Strong Buy), but holds Style Scores of a “D” for both Value and Growth. GE has taken some huge hits over the past three years, but continues to operate some very profitable segments.

Hopefully, the company can bounce back from misjudging the pace of the global energy transition and its subsequent loss on its gas turbine bet. Earnings and revenues are not estimated to come out positive this quarter, but GE has had some large beats in the past.

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