Personal Finance

General Electric Company Disappoints Again -- What It Means to Investors

GE Chart

Another quarter and another revenue disappointment from General Electric Company (NYSE: GE) . In other words, the company is starting 2017 in the way it left 2016: executing solidly, but missing revenue estimates while finding ways to meet earnings guidance from non-core sources. As you can see in the chart below, it's not enough of a formula to convince investors, and the stock price has notably underperformed the S&P 500 and its peers. What's going on, and is it reason to panic?

GE data by YCharts .

General Electric Company guidance cuts

It's useful to look at a timeline showing how organic revenue growth guidance changed throughout the year. As the table illustrates, expectations were incrementally lowered as the year progressed. In the end, organic revenue growth was flat, or 1% if you include the Alstom assets acquired in November and December of 2015 and 2016. In addition, the fourth quarter was particularly disappointing, with core organic industrial revenue declining 1%.

Date Event Full-Year 2016 Revenue Growth Guidance
January 2016 Q4 Earnings 2% to 4%
April 2016 Q1 Earnings Maintained at 2% to 4%
July 2016 Q2 Earnings Guided toward the lower end of 2% to 4%
October 2016 Q3 Earnings Reduced to 0% to 2%, and guided toward the lower end
December 2016 Annual Outlook Meeting No change
January 2017 Q4 Earnings Actual was 0%, and 1% including Alstom

Data source: General Electric Company presentations.

To be fair, GE's full-year operating earnings per share (EPS) came in at $1.49, a figure within the $1.45-$1.55 guidance range given at the start of the year, and also within the $1.48-$1.52 range given on the third-quarter earnings call.

However, as noted above, part of the reason for this was contributions from non-core areas. For example, GE's cash flow was better than expected due to full-year GE Capital dividends coming in $2.1 billion better than expected -- $20.1 billion, compared to original guidance of $18 billion -- while dispositions contributed $4 billion, compared to an original expectation of $2 billion to $3 billion. As a result, EPS received a boost as GE used the cash to increase share buybacks. For the full year, buybacks were increased to $22 billion from an original target of $18 billion given at the start of the year.

Clearly, GE can't rely on asset sales and dividends from GE Capital to boost EPS indefinitely; the challenge is to grow industrial EPS in line with its overarching strategic goals. The question now is how investors should understand the 3%-5% organic revenue growth forecast for 2017. Moreover, is GE a company that's scrambling to meet earnings expectations, only to ultimately flounder on the way toward its target of $2 in operating EPS in 2018?

Still on track, but only just

On balance, I believe GE is still on track, for three reasons.

First, the revenue growth reductions have largely come from oil and gas, and GE isn't the only company to have been overly optimistic with regard to guidance. Meanwhile, the rest of the industrial business is growing at a good rate. For example, excluding oil and gas, and including Alstom assets, organic revenue growth was 8% in the fourth quarter.

Oil rig workers against the setting sun.

Image source: Getty Images

In addition, a GE competitor in oil and gas, Dover Corp , has seen the beginnings of a recovery in its early-cycle oil and gas business. GE CFO Jeff Bornstein expects the first half of 2017 to be "challenging," but sees " sequential improvements in the second half of the year." Indeed, organic oil and gas orders grew 2% in the fourth quarter, with CEO Jeff Immelt pointing out it was the "first growth in two years."

Alstom integration going well

Second, organic revenue growth, including Alstom assets, was 4% in the fourth quarter -- pretty much in line with previous guidance. While it's easy to conclude that it's down to acquisitions (without Alstom, organic revenue declined 1% in the quarter), the fact is that integrating Alstom is a key part of the company's strategy, and investors should judge it as such.

Moreover, according to Immelt on the earnings call, "Alstom synergies are ahead of plan" and GE has managed to strongly increase order growth, with Alstom equipment orders growing "four times" and service orders up 61% organically.

So organic revenue growth was 4%, and GE is targeting 3%-5% in 2017. In other words, it's already on track.

Power circumstances

Third, the power business was a bit weaker than expected, but management believes the reasons for this are transitory. Bornstein noted that "the business shipped 104 gas turbines this year; we'd expected to ship 110 to 115. We expected to ship six more units but those transactions did not close in the quarter, but we expect that those units will close in 2017."

General Electric Company uses this device to test its jet engines. Image source: General Electric Company

Immelt later explained that four of these turbines were going to Bahrain and Iraq -- not easy places to ship to -- so some delays are understandable. The other two were for West Africa, where, according to Immelt, the customer is considering buying a larger H-class turbine from GE instead.

Looking ahead

All told, investors should give GE the benefit of the doubt. The company offers investors something different in 2017 in terms of growth opportunities from the Alstom and Baker Hughes deals, while ongoing Industrial Internet of Things initiatives promise a great deal of future growth.

However, GE needs to start underpromising and overdelivering on revenue forecasts, otherwise investors will start to get nervous about its 2018 target of $2 in operating EPS. A couple of solid quarters without any negative guidance revisions are needed in order to fully restore confidence in GE's forecasting abilities.

10 stocks we like better than General Electric

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and General Electric wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Personal Finance Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More