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Why Is GE (GE) Down 7.2% Since Last Earnings Report?

Zacks Equity Research
Polaris Industries (PII) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

A month has gone by since the last earnings report for General Electric (GE). Shares have lost about 7.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is GE due for a breakout? 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 catalysts.

General Electric Q1 Earnings Beat Estimates, Down Y/Y

General Electric has reported better-than-expected results in first-quarter 2019, delivering a positive earnings surprise of 55.6%. This came in after the company recorded weaker performances in two consecutive quarters. Also, sales in the quarter surpassed estimates by 1.4%.

This industrial conglomerate's adjusted earnings in the reported quarter were 14 cents per share, surpassing the Zacks Consensus Estimate of 9 cents. However, the bottom line reflected a 7% decline from the year-ago figure of 15 cents due to weakness in revenue performance and decline in margins.

Weakness in Industrial Affects Revenues

In the quarter under review, General Electric's consolidated revenues totaled $27,286 million, reflecting a year-over-year decline of 1.8%. The performance was adversely impacted by weakness in Industrial revenues. However, the top line surpassed the Zacks Consensus Estimate for revenues of $26,921 million.

On a segmental basis, the company's Industrial revenues decreased 2.4% year over year to $25,409 million. The segment's organic revenues grew 5% more than the year-ago quarter to $26,170 million. Industrial orders grew 9% organically while backlog (at the end of the quarter) of $374.2 billion reflects growth of 6%.

Performance of the Industrial segment's components businesses are discussed below:

Oil & Gas revenues increased 4% year over year to $5,616 million on the back of 9% growth in orders. Organically, the segment's sales increased 8% year over year on the back of 12% growth in orders.

Aviation revenues grew 12% to $7,954 million on the back of 7% improvement in orders, driven by rising popularity of LEAP engines. Healthcare revenues in the reported quarter totaled $4,683 million, roughly flat year over year while orders were up 4%. On an organic basis, revenues increased 4% on the back of 10% growth in orders.

Renewable Energy revenues totaled $1,604 million, down 3% year over year and its orders increased 1% in the reported quarter. Organically, the segment’s sales increased 3% year over year on the back of 3% growth in orders.

Power segment's revenues were down 22% year over year to $5,659 million and orders declined 14%. On an organic basis, the segment's sales were down just 4% while orders increased 14% on the back of healthy orders of equipment in Gas Power.

GE Capital's revenues in the reported quarter totaled $2,227 million, up 2.5% year over year.

Margins Suffer Y/Y

In the quarter under review, General Electric's cost of sales decreased 2.7% year over year to $20,373 million. It represented 74.6% of the quarter’s revenues versus 75.3% in the year-ago quarter. Selling, general and administrative expenses in the quarter increased 1.4% year over year to $4,146 million. It was 15.2% of the quarter’s revenues versus 14.7% in the year-ago quarter.

The Industrial segment's adjusted operating profit in the quarter decreased 14% year over year to $2,239 million while margins fell 120 basis points to 8.8%. On a reported basis, this segment's profits declined 1%. On a segmental basis, operating performance suffered from a decline in Power (down 71%) and Renewable Energy (recorded loss in the reported quarter against profits in the year-ago quarter), partially offset by an improvement in profits in Oil & Gas (reported profits against loss in the year-ago quarter), Aviation (up 4%) and Healthcare (up 6%).

The GE Capital segment recorded profits of $135 million in the quarter under review.

Balance Sheet and Cash Flow

Exiting the first quarter of 2019, General Electric had cash and cash equivalents of $73.2 billion, up from $68.7 billion recorded at the end of the last reported quarter.

Adjusted free cash outflow from GE Industrial totaled $1,216 million versus cash outflow of $1,756 million in the year-ago quarter.

Restructuring

In June 2018, General Electric communicated plans to transform itself into a high-tech industrial company — focused on Aviation, Power and Renewable Energy.

In sync with its plans, the company completed the sale of the transportation business to Wabtec Corporation in the first quarter of 2019.

Also, General Electric announced to have agreed to divest the BioPharma business to Danaher Corporation. Subject to the receipt of regulatory approvals and fulfillment of customary closing conditions, the divestment is anticipated to be completed in the fourth quarter of 2019.

Efforts are on track to reduce exposure in the GE Capital business. Assets disposition have amounted to approximately $16 billion till date, including roughly $1.1 billion completed in the first quarter of 2019. Also, the company reduced debt (external) by $2 billion in the first quarter.

Outlook

In the quarters ahead, General Electric believes that it will gain from the launch of the digital business, focus on expanding commercially in emerging markets, efforts to reduce leverage and lowering exposure to the GE Capital business.

The company maintained projections for 2019. The Industrial segment's organic revenues are anticipated to increase in a low to mid-single digit. The segment's margins will expand, with adjusted margin remaining flat to increase 100 basis points.

Power's organic revenues are expected to decline in a high-single digit and margin is likely to be positive. Aviation’s organic sales are predicted to increase in a high-single digit on the back of strengthening services and military businesses. Margin is predicted to be roughly 20%.

Renewable Energy's organic revenues are predicted to increase in double-digits and margin is likely to contract. Healthcare's organic revenues are predicted to increase in a mid-single digit and margin is predicted to expand.

GE Capital's total debts are predicted to be $62-$64 billion, down from $66 billion in 2018 while liquidity is anticipated to improve to roughly $20 billion versus $15 billion recorded in 2018.

The company's adjusted earnings are predicted to be 50-60 cents per share in 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, GE has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.

Outlook

GE has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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