GE Beats Q3 Earnings, Misses Revenues; 2016 View Narrowed

Despite a challenging macroeconomic environment, sustained restructuring initiatives for a leaner firm with a re-focus on core operations enabled General Electric Company (NYSE:GE) to report relatively healthy third-quarter 2016 results. GAAP net earnings for the reported quarter were $1,994 million or 22 cents a share compared with $2,506 million or 25 cents a share in the year-ago quarter.

Including industrial and other verticals, operating earnings were 32 cents per share and improved 10% year over year. The operating earnings (including industrial and other verticals) for the reported quarter marginally beat the Zacks Consensus Estimate by a penny.

Revenues

Total consolidated revenue for the reported quarter increased 4% year over year to $29,266 million from $28,028 million in the year-earlier quarter, but missed the Zacks Consensus Estimate of $29,836 million. While the Industrial segment revenue increased 4% year over year to $27,421 million, GE Capital revenues declined 2% to $2,600 million. Organic revenue growth for the Industrial segment improved 1% for the quarter.

Total orders for the quarter for the Industrial segment increased 16% year over year to $26.9 billion, with significant order improvements from the Renewable Energy and Energy Connections & Lighting segments, partially offset by considerable declines from Transportation and Oil & Gas. Total backlog of equipment and services at quarter-end was $319 billion, up 18% year over year.

Revenue by Segment

Beginning the third quarter of 2016, General Electric has combined the erstwhile Energy Connections and Appliances & Lighting segments into a single reporting segment called Energy Connections & Lighting. Revenues from this segment decreased 22% to $3,151 million on softer oil & gas and Industrial Solutions markets. During the reported quarter, Oil & Gas revenues declined 25% year over year, due to macroeconomic headwinds and volatility in oil prices, to $2,964 million. Revenues from Aviation segment were up 5% year over year to $6,300 million largely due to higher services revenue. Transportation revenues declined 22% year over year to $1,249 million on lower locomotive deliveries.

Power segment revenue was up 37% year over year to $6,506 million with strong execution of projects. Revenues from the Healthcare segment improved 5% to $4,482 million due to solid volume and cost productivity. Revenues from the Renewable Energy segment were up 66% year over year to $2,770 million largely due to higher turbine shipments owing to Alstom (PA:ALSO).

Revenues from the GE Capital segment decreased 2% year over year to $2,600 million. During the first nine months of the year, GE Capital returned $16 billion in dividends to parent General Electric and remained on track to exceed the tally of $18 billion in 2016. Ending net investment or ENI (MI:ENI) (excluding cash and cash equivalents) for GE Capital was $79.1 billion at quarter-end, down 55.1% year over year.

Margins, Balance Sheet and Cash Flow

Owing to a highly volatile environment and sluggish growth across the globe, General Electric recorded a decline in margins in the reported quarter despite stringent cost-cutting and simplification initiatives. Industrial segment operating profit decreased 5% (organic growth down 3%) year over year to $4,320 million, with a significant fall in profits in Energy Connections & Lighting (down 84%), Oil & Gas (down 42%) and Transportation (down 18%), partially offset by a rise in profits in Renewable Energy (up 16%) and Power (up 12%). Gross margin for the Industrial segment improved 150 bps to 29.0%, while non-GAAP operating margin remained flat at 17.3%.

Cash generated from operating industrial activities (excluding dividends) for the first nine months of 2016 totaled $3,368 million. Cash and marketable securities at quarter-end aggregated $98.9 billion.

Restructuring Initiatives

General Electric is actively pursuing its 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 is pruning its operating portfolio to focus on core manufacturing businesses with a digital edge.

Since Apr 2015 till the end of Sep 2016, GE Capital inked sale agreements worth approximately $193 billion in ENI, of which it has already completed deals worth $173 billion. 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.

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During the reported quarter, GE Digital acquired Meridium, Inc., a global leader in asset performance management (APM) software and services for asset-intensive industries. The acquisition will facilitate GE Digital to augment its comprehensive APM offering by leveraging Meridium’s expertise in cognitive analytics, reliability centered maintenance, operational risk management and asset health, as well as intelligent asset strategies.

The company also announced plans to acquire Arcam AB and SLM Solutions Group AG, two leading suppliers of additive manufacturing (also called 3D printing) equipment, for $1.4 billion. The twin acquisitions will augment its existing material science and additive manufacturing capabilities as it expects to grow the new additive business to $1 billion by 2020 at attractive returns.

In addition, GE Transportation acquired ShipXpress, a premier provider of cloud-based software solutions, for an undisclosed amount. The deal is likely to expand General Electric’s Transportation portfolio and enrich its human capital as it will gain nearly 200 industry, technical, and software development experts who have been providing their services to ShipXpress. The amalgamation of ShipXpress’ innovative software products and General Electric’s advanced sensing technology will further help enhance the Predix platform of the latter.

During the quarter, General Electric further completed the divesture of the majority of GE Capital’s restaurant franchise financing assets in the U.S. The assets were sold to three separate buyers. The transactions included about $1.3 billion in ending net investment (ENI).

Outlook Narrowed

General Electric aims to build upon the momentum for a healthy rise in operating profit in the next year and narrowed its earlier guidance. The company anticipates operating earnings in 2016 to be within $1.48-$1.52 a share, compared to its earlier range $1.45-$1.55. The Zacks Consensus Estimate for 2016 is currently pegged at $1.49 and lies comfortably within the predicted range.

Organic revenue growth in 2016 is currently expected to be 0-2% compared to earlier projections of 2-4%. General Electric intends to return $30 billion to the shareholders in 2016, including $8 billion in dividends and $22 billion in share repurchases. In addition, the company expects to generate in excess of $32 billion in cash flow from operations in 2016, up from $30-$32 billion expected earlier.

General Electric currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Danaher Corp. (NYSE:DHR) , Leucadia National Corporation (NYSE:LUK) and Macquarie Infrastructure Corporation (NYSE:MIC) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Danaher has a long-term earnings growth expectation of 11.7% and is currently trading at a forward P/E of 22.4x.

Leucadia has a long-term earnings growth expectation of 18.0% and is currently trading at a forward P/E of 94.0x.

Macquarie is currently trading at a forward P/E of 70.6x.

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