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General Electric (GE) Down 2.7% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for General Electric CompanyGE . Shares have lost about 2.7% 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 Q4 Earnings in Sync, Revenues Missed; 2017 View Bullish

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 healthy fourth-quarter 2016 results. GAAP net earnings for the reported quarter were $3,486 million or $0.39 a share compared with $6,283 million or $0.64 a share in the year-ago quarter. Including industrial and other verticals, operating earnings were $0.46 per share and declined 12% year over year primarily due to divested businesses. However, operating earnings (including industrial and other verticals) for the reported quarter matched the Zacks Consensus Estimate.

For full year 2016, General Electric reported GAAP net income of $8,176 million or $0.89 per share compared to a loss of $6,145 million or a loss of $0.61 per share. Including industrial and other verticals, operating earnings for 2016 were $1.49 per share compared with $1.31 for full year 2015.

Revenues

Total consolidated revenue for the reported quarter decreased 2% year over year to $33,088 million and missed the Zacks Consensus Estimate of $34,150 million. While the Industrial segment revenue remained relatively flat year over year at $31,236 million, GE Capital revenues improved 2% to $2,649 million. Organic revenues for the Industrial segment decreased 1% for the quarter to $27,295 million. For full year 2016, consolidated revenues were $123,693 million compared with $117,386 million in 2015.

Total orders for the quarter for the Industrial segment increased 4% year over year to $33.9 billion, with significant order improvements from the Renewable Energy and Energy Connections & Lighting segments, partially offset by considerable declines from Transportation. Total backlog of equipment and services at quarter-end was $321 billion, up 2% year over year.

Revenue by Segment

Revenues from Energy Connections & Lighting decreased 29% to $3,151 million on softer oil & gas and Industrial Solutions markets. During the reported quarter, Oil & Gas revenues declined 22% year over year, due to macroeconomic headwinds and volatility in oil prices , to $3,402 million. Revenues from the Aviation segment were up 7% year over year to $7,187 million largely due to higher services revenue. Transportation revenues declined 23% year over year to $1,243 million on lower locomotive shipments.

Power segment revenue was up 20% year over year to $8,479 million with strong revenues from core equipment. Revenues from the Healthcare segment improved 3% to $5,101 million due to solid volume and cost productivity. Revenues from the Renewable Energy segment were up 29% year over year to $2,500 million largely due to higher turbine shipments owing to Alstom.

Revenues from the GE Capital segment increased 2% year over year to $2,649 million. During 2016, GE Capital returned $20.1 billion in dividends to parent General Electric and comfortably exceeded its original target of $18 billion. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $92.8 billion at quarter-end, down 44.2% year over year.

Margins, Balance Sheet and Cash Flow

General Electric recorded an improvement in margins in the reported quarter due to stringent cost-cutting and simplification initiatives. Industrial segment operating profit increased 6% year over year to $5,842 million, with a rise in profits in Power (up 27%), Aviation (up 11%) and Healthcare (up 10%), partially offset by a significant fall in profits in Energy Connections & Lighting (down 63%) and Oil & Gas (down 43%). Total segment profit increased 55% year over year to $6,057 million. Gross margin for the Industrial segment declined 10 bps to 28.7%, while non-GAAP operating margin decreased to 17.3% from 18.3% in the prior-year period.

Cash generated from operating industrial activities (excluding deal taxes and pension funding) for 2016 totaled $11,611 million compared with $12,238 million in 2015. Cash and marketable securities at quarter-end aggregated $92.4 billion, while free cash flow was $27,282 million.

Restructuring Initiatives

General Electric underwent massive restructuring initiatives in order to create a simpler and nimbler firm. From a classic conglomerate with diversified business interests in financial services, media, industrial and technology-based operations, the company pruned its operating portfolio to focus on core manufacturing businesses with a digital edge.

Since Apr 2015 till the end of 2016, GE Capital inked sale agreements worth approximately $197 billion in ENI, of which it has already completed deals worth $190 billion. The company has more or less completed its GE Capital exit plan about one year ahead of the schedule. The transactions are in conformity with the corporate strategy of building a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to comprise over 90% of its total operating earnings by 2018, up from 58% in 2014.

During the reported quarter, GE Digital acquired ServiceMax, a premier cloud-based field service management solutions provider, for $915 million. The transaction will enable General Electric to automate and digitize the servicing of heavy-duty machinery as it aims to focus on core manufacturing businesses with a digital edge.

The acquisition of ServiceMax is likely to accelerate the commercialization of the Predix software of General Electric. Predix is designed to add intelligence to the Internet of Things applications. It helps companies to connect their machines, data and people and run industrial-scale analytics. The combination of machine connectivity with a data lifecycle management platform powered by engineering simulation will help diverse firms to design their products for the Industrial Internet in the best way possible. Consequently, the transaction is likely to generate incremental revenues for the company.

During fourth- quarter 2016, General Electric also inked a definitive agreement with Baker Hughes Incorporated to merge its Oil & Gas business with the latter 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 will form a new entity (the "New" Baker Hughes) using a partnership structure, pursuant to which both the parties will contribute their operating assets to the newly formed partnership. General Electric will own the majority stake of 62.5% in the new company, and the remainder will be held by the erstwhile Baker Hughes shareholders.

With a complimentary portfolio of operating assets and integrated offerings, the new entity will be able to better serve the existing customers of both the companies. Although this multi-billion deal is expected to have minimal effect on the impending quarterly results, it is likely to attract other lucrative businesses for General Electric and improve its top-line growth. Experts widely believed that GE Oil & Gas business lacked product breadth and was losing market share in a few key product lines, leading to increased risk of asset erosion. The strategic deal, therefore, fortifies the beleaguered business to ramp up its operations to fend off competition from rivals.

Outlook Bullish

General Electric aims to build upon the momentum for a healthy rise in operating profit in 2017. The company anticipates operating earnings in 2017 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 three revisions lower for the current quarter. In the past month, the consensus estimate has shifted 44.09% downward due to these changes.

General Electric Company Price and Consensus

General Electric Company Price and Consensus | General Electric Company Quote

VGM Scores

At this time, General Electric's stock has a poor score of 'F' on both growth and momentum front. Charting a somewhat similar path, 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 aggregte VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Interestingly the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.

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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.

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