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General Electric Pre-Earnings: What to expect?

General Electric ( GE ) will announce its Q3'16 earnings on Friday, September 21st. We expect single digit growth in its earnings due to improved crude oil prices in Q3'16, the high backlog of the Alstom joint venture in Q2'16 and the mild impact of GE's Predix platform on its industrial businesses. In both anticipation of, and then in response to decision of OPEC to cap production led to an increase in oil prices in the first half of 2016. However, the final deal has not been signed yet, which poses some risk for the oil and gas industry.

After closing the Alstom deal in 2015, GE started to capitalize on the joint venture and is likely to continue that momentum going forward. Additionally, GE's Predix platform will be very crucial for its growth as it will enable data driven decision making for its industrial segments and optimize its production and operations.

Recovery in crude oil prices

Improved oil prices are likely to strengthen oil and gas industry resulting in increased revenues for GE's Oil & Gas, Energy management and Transportation segments for full year 2016. This may break the ongoing weakness in oil and gas industry after about 2 years. Oil & gas segment contributed about 14% to GE's overall revenues in 2015 and oil prices also indirectly impact their Aviation industry segment which contributed nearly 21% of company's revenues in 2015.

Crude oil prices surged by 21.5% in Q3'2016 as Organization of Petroleum Exporting Countries (OPEC) finally concluded that they will cap their combined oil production between 32.5 and 33 million barrels per day. Although this triggered an oil price surge, Iran and others may not commit to it as the final agreement has not been signed yet. Iran may resist again as it emerged from years of international sanctions in January 2016.

We forecast 6.3% increase in GE's Oil and gas segment for the full year 2016 despite weakness in the industry due to increased oil prices after OPEC announcement of capping production.

Joint venture with Alstom to start paying off

GE completed the acquisition of majority of Alstom SA's energy business for $13.5 billion in November 2015. This is the company's largest industrial investment so far and is expected to significantly expand industrial portfolio and footprint globally. Alstom's orders in Q2'16 increased by about 150% from Q1'16 and is further expected to increase due to GE's diversified portfolio, innovative products and growth of global renewable energy demand. Alstom equipment backlog was up 22% with net sales of $3.2 billion in Q2'16, indicating favorability for Alstom products. We expect this momentum to continue in Q3'16.

GE's Predix platform to support its traditional businesses

GE launched its industrial internet of things (IoT) platform named Predix in 2016, which was first unveiled by GE in 2013, in order to bolster its position in the fast growing industrial IoT market. By leveraging Predix with its industrial segments, GE plans to optimize production operations, asset management and bring digital technology into its engineering, procurement and construction processes. GE also expects reduced production deferrals, data visibility and efficient decision making through its pilot using Predix and Oil and Gas segment in 2016. We believe that GE Predix platform can add more than $6 billion of revenues annually once fully implemented.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of General Electric

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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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