General Electric (GE) Q2 Earnings Beat, Down on Weak Margins

General Electric Company GE reported better-than-expected results in second-quarter 2018, delivering a positive earnings surprise of 5.6%. This was the company’s second consecutive quarter of recording an earnings beat. The first-quarter earnings surprise was a positive 45.45%.

This industrial conglomerate’s adjusted earnings in the reported quarter were 19 cents per share, surpassing the Zacks Consensus Estimate of 18 cents. However, the bottom line reflected 10% decline from the year-ago tally of 21 cents, due to weak margins in the quarter under review.

Revenues Improve on Industrial Segment

In the quarter under review, General Electric’s consolidated revenues totaled $30,104 million, increasing 3% year over year. The improvement came on the back of rise in Industrial revenues, partially offset by the poor performance of GE Capital. Also, the top line surpassed the Zacks Consensus Estimate of $29,823 million by 0.9%.

On a segmental basis, the company’s Industrial revenues increased 4% year over year to $28,657 million. The segment’s organic revenues declined 6% over the year-ago quarter to $25,242 million.

Performance of the Industrial segment’s components businesses are discussed below:

Oil & Gas revenues increased 85% year over year to $5,554 million, due to improved benefits secured from Baker Hughes, a GE company BHGE. Synergistic gains from Baker Hughes in the reported quarter amounted to $189 million ($700 million anticipated in 2018).

Aviation revenues grew 13% to $7,519 million on the back of 29% growth in orders, driven by growing popularity of LEAP engines and key GEnx wins. Healthcare revenues in the reported quarter totaled $4,978 million, increasing 6% on the back of 9% sales growth in emerging markets and 5% increase in sales generated from developed markets.

However, revenues from the Lighting segment were down 9% year over year to $431 million while its orders declined 28%. Renewable Energy revenues declined 29% to $1,653 million and its orders were fell 15% year over year.

Transportation revenues declined 13% year over year to $942 million while its orders grew 42% year over year on higher locomotive orders from North America. Power segment revenues were down 19% year over year to $7,579 million while orders declined 26% year over year.

GE Capital’s revenues in the reported quarter totaled $2,429 million, down 1% year over year.

Margins Suffer

In the quarter under review, the Industrial segment’s adjusted operating profit decreased 11% year over year to $2,917 million while margins fell 160 basis points year over year. Results suffered from a decline in Power (down 58%), Renewable Energy (down 48%) and Transportation (down 15%), partially offset by an improvement in profits in Oil & Gas (up 85%), Aviation (up 7%), Healthcare (up 12%) and Lighting (up 41%).

The company is following stringent cost-cutting and simplification initiatives, reducing Industrial structural costs by $322 million in the reported quarter and roughly $1.1 billion in the first half of 2018. The company remains on track to reduce Industrial structural costs in excess of $2 billion in 2018.

The GE Capital segment generated loss of $273 million versus $324 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter of 2018, General Electric had cash and cash equivalents of $64.3 billion, down from $69.3 billion recorded at the end of the previous quarter.

Adjusted free cash flow from GE Industrial totaled $258 million, down 30% from $369 million generated in the year-ago quarter.

Outlook

In second-quarter 2018, General Electric communicated plans to transform itself into a high-tech industrial company — focused on Aviation, Power and Renewable Energy. It will separate GE Healthcare and turn it into a stand-alone company while exiting oil and gas businesses by disposing of its 62.5% interest stake in Baker Hughes. Beside these, GE Transportation will be sold to Wabtec Corp. and efforts are on track to shrink exposure in GE Capital business.

The company reiterated its guidance for 2018, with adjusted earnings per share of $1.00-$1.07, with momentum in Aviation and Healthcare, and persistent challenges in the Power segment. Adjusted Industrial free cash flow is predicted to be roughly $6 billion.

General Electric Company Price, Consensus and EPS Surprise
 

General Electric Company Price, Consensus and EPS Surprise | General Electric Company Quote

Zacks Rank & Key Picks

With a market capitalization of $119.3 billion, General Electric currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the industry are Hitachi Ltd. HTHIY and Raven Industries, Inc. RAVN. These stock sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.  

In the next three to five years, earnings are projected to grow 13% for Hitachi and 10% for Raven Industries.

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General Electric Company (GE) : Free Stock Analysis Report
 
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Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
 
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