- $0.46 is expected on revenues of $31.76 billion. These would be good numbers in a difficult market at present.
- Synergies will eventually come from the Alstom takeover. Recent shutting of plants will end up being a good move.
- Aviation and Healthcare are projected to rise in Q2. Leap engine schedule is critical to ensure guidance is met by years end.
General Electric Company (NYSE:GE) is set to announce its Q2 earnings this Friday and $0.46 is the EPS number analysts will be expecting before the bell. Furthermore, sales of $31.76 billion are expected which, if met, will be a $2.44 billion increase from the corresponding quarter in 2015. Investors will be tuning in to see how much damage the oil and gas division would have done in the second quarter. Although the price of crude oil has rallied strongly this year, the demand for GE's products and services in this division has decreased which is why the company is expecting at least a 15% drop in revenue from its $16.5 billion figure in 2015.
Interestingly, the company has not changed its full year EPS guidance of between $1.45 and $1.55 despite its current oil and gas woes. Therefore its power, aerospace and health divisions are expected to drive the top and bottom line forward once more. In a difficult operating environment, the share price has rallied almost 6% this year up to $33 a share and has recovered excellently from the Brexit debacle although it has underperformed the market. Will its impending earnings numbers provide more fuel to its post Brexit rally? Lets discuss.
In the power division, GE announced recently that it will be closing three Alstom plants which will result in 200 jobs being lost by year end. Investors and shareholders alike would have seen this coming as GE will relentlessly keep looking to cut costs and unlock synergies from the Alston takeover. Why? Well, although revenue is this division rose to $5.2 billion in the first quarter ($1.4 billion from Alstom), operating margin dropped to 11.3% which was a 120 basis point slide from the previous quarter. However, fundamentals look strong in this division. Presently the company has a heavy backlog and expects to deliver at least 110 gas turbines which will comprise of 24 new HA turbines before year end. Furthermore, the more HA turbines get shipped, the more margins will improve going forward. Power is what will lead GE in the next few years so investors will be looking for nice growth rates, strong guidance and margin improvements going into the third and fourth quarters.
Secondly, GE's aviation division provides a nice buffer against weakness in its oil and gas division as positive growth in one should offset negative growth in the other. In fact, you can surmise that GE's growth in aviation last quarter came from higher traffic in the aviation industry. Revenue came in at $6.26 billion last quarter which was a 10% increase in volume but what really peeked my interest was the margin expansion to 24.3% and the company's guidance for the second quarter. GE is guiding that it will ship between 15 to 20 LEAP engines in the second quarter alone and service volumes are expected to hold strong. Service revenue in this division is imperative as it carries higher margins than general sales. Investors will be watching to see if full year guidance of 110 engines will hold strong and if margins can keep creeping up into the third quarter
Healthcare grew its operating profits by 7% in the first quarter as restructuring and investment definitely seem to be having an effect. Demand for the company's ultrasound products and revolution CT remain strong with GE renewing its collaboration with SonoSim regarding its ultrasound technology. Focus will now be put on Women and urology which again should open more recurring income streams. In terms of forward-looking guidance, investors will be looking to see who the company will acquire next in the gene and cell therapy space. After acquiring the biosafe group recently, GE is already talking about more acquisitions in this space as more integration is a distinct possibility here. Furthermore, investors will look for information regarding its latest cloud deal with Microsoft (NSDQ:MSFT) to see how this partnership can be leveraged going forward.
To sum up, General Electric may be up almost 6% year to date but it has underperformed the market. The oil and gas division is definitely taking its toll but the likes of power, aviation and healthcare can most certainly carry the baton for 2016. Watch margin levels. They should improve in power as synergies will ultimately come through from the Alstom deal, Furthermore, if healthcare and aviation guidance remains strong, GE should rally as long as it at least meets earnings and revenue estimates .