It has been about a month since the last earnings report for General Electric Company GE. Shares have lost about 7.3% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
GE Excels Q2 Earnings & Revenue Estimates, Affirms 2017 View
Despite a challenging macroeconomic environment, sustained restructuring initiatives for a leaner firm with a re-focus on core operations enabled General Electric to report relatively strong second-quarter 2017 results. GAAP net earnings from continuing operations for the reported quarter were $1,338 million or $0.15 a share compared with $3,300 million or $0.36 a share in the year-ago quarter. Including industrial and other verticals, operating earnings were $0.28 per share, which beat the Zacks Consensus Estimate by $0.03.
Total consolidated revenue for the reported quarter decreased 12% year over year to $29,558 million but surpassed the Zacks Consensus Estimate of $29,123 million. While the Industrial segment revenue decreased 2% year over year to $28,047 million, GE Capital revenues declined 12% to $2,446 million. Organic revenues for the Industrial segment increased 2% for the quarter to $27,992 million.
Total orders for the quarter for the Industrial segment increased 6% year over year to $28.3 billion, with significant order improvements from the Transportation, Aviation and Oil & Gas segments, partially offset by decline in Energy Connections. Total backlog of equipment and services at quarter-end was $326.8 billion, up 2% year over year.
Revenue by Segment
Revenues from Energy Connections & Lighting decreased 27% to $3,210 million due to decline from legacy businesses. During the reported quarter, Oil & Gas revenues were down 3% year over year, due to macroeconomic headwinds and volatility in oil prices, to $3,108 million. Revenues from the Aviation segment remained flat at $6,532 million largely due to higher services revenue. Transportation revenues declined 14% year over year to $1,071 million on lower locomotive shipments.
Power segment revenue was up 5% year over year to $6,969 million with strong revenues from core equipment. Revenues from the Healthcare segment improved 4% to $4,700 million due to solid volume and cost productivity. Revenues from the Renewable Energy segment were up 17% year over year to $2,457 million largely due to higher services revenue.
Revenues from the GE Capital segment decreased 12% year over year to $2,446 million. During the quarter, GE Capital returned $2 billion in dividends to parent General Electric.
Margins, Balance Sheet and Cash Flow
General Electric recorded an overall improvement in margins in the reported quarter due to stringent cost-cutting and simplification initiatives. Industrial segment operating profit decreased 4% year over year to $3,947 million, with a decline in profits in Oil & Gas (down 52%), Energy Connections & Lighting (down 39%), Transportation (down 26%) and Power (down 10%), partially offset by a significant rise in profits in Renewable Energy (up 25%) and Aviation (up 11%). Total segment profit increased 7% year over year to $3,775 million. Non-GAAP operating margin for the Industrial segment increased to 13.2% from 13.1% in the prior-year period.
Cash generated from operating industrial activities for the quarter (excluding deal taxes and pension plan) totaled $1,467 million. Cash and marketable securities at quarter-end aggregated $84 billion, while free cash flow (excluding deal taxes and pension plan) was $2,734 million. The company returned $3.4 billion to shareholders during the quarter, including $1.3 billion in share buyback, bringing its respective year-to-date tally at $7.8 billion and $3.6 billion.
Other Significant Quarter Details
During the quarter, General Electric reshuffled its top management. John Flannery, the current President and CEO of GE Healthcare would take the helm as the CEO from Aug 01, 2017, and Chairman and CEO effective Jan 01, 2018, replacing Jeff Immelt, who led the company since 2001. Flannery has led complex financial and industrial businesses of General Electric across the world and is likely to capitalize on his rich experience to fuel its growth engine.
General Electric also completed the merger of its Oil & Gas business with Baker Hughes Incorporated to form an industry leader with an unrivalled mix of service and equipment capabilities. Under the terms of the agreement, GE Oil & Gas and Baker Hughes formed a new entity (the “New” Baker Hughes – a General Electric company) using a partnership structure, following which both the parties contributed their operating assets to the newly formed partnership. General Electric owns the majority stake of 62.5% in the new company and the remainder is held by the erstwhile Baker Hughes shareholders. The “New” Baker Hughes, to be listed as BHGE, has dual headquarters in Houston, TX and London, U.K., along with nearly identical representation in the Board of Directors. It has operations in over 120 countries and combined revenues of $23 billion.
With a complementary portfolio of operating assets and integrated offerings, the new entity will be able to better serve the existing customers of both the companies. While General Electric possess unique capabilities in fullstream oil and gas manufacturing and technology solutions spanning across subsea & drilling, rotating equipment, imaging and sensing, Baker Hughes has proven expertise in drilling & evaluation and completion & production services. The transaction has reportedly created the second largest player in the oilfield equipment and services industry. Through effective utilization of combined resources, the synergistic deal is likely to yield $1.6 billion by 2020. The transaction is anticipated to be accretive to General Electric’s earnings by $0.04 per share by 2018 and $0.08 by 2020.
General Electric aims to build upon the momentum for a healthy rise in operating profit and reaffirmed its guidance for 2017. The company continues to anticipate operating earnings to be within $1.60–$1.70, with organic growth of 3–5%. General Electric intends to return $19–$21 billion to the shareholders in 2017, including $8 billion in dividends and $11–$13 billion in share repurchases. In addition, the company expects to generate $18–21 billion in cash flow from industrial operations in 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
General Electric Company Price and Consensus
General Electric Company Price and Consensus | General Electric Company Quote
At this time, the stock has a poor Growth Score of F, however its Momentum is doing a lot better with a C. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.
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