- Commentary on the integration of Alstom will be important. Look for updated guidance on margins.
- 3D printing technology has the potential to improve the backlog situation in Aviation. Near term guidance is critical here.
- Value investors will be looking for commentary on the dividend. Will it get raised?
General Electric Company (NYSE:GE) announces third quarter earnings on the 21st of October. Analysts are estimating $0.32 in earnings per share on $29.85 billion in top-line line. I wrote an article recently and discussed the fact that I like GE stock for the long-term, although we may get some short-term weakness. Why? Well, investors should remember that GE has what it needs to deliver in the second half of this year, even after reporting a 1% fall in revenues in the first six months of 2016. In fact, the company has already stated that it expects a 2% rise in top-line for full fiscal 2016. This would mean that we need to see a 5% rise for the last 6 months, which is definitely possible due to the backlog the company has on his books. I just feel that it has to meet its guidance in order to avoid a meaningful sell-off in the stock. Therefore, established divisions such as Power, Health-Care and Aviation will again need to come to the fore to offset the obvious losses that will come from Energy at present.
Power Revenues Will Be Strong But How Will Margins Hold Up?
With the Alstom acquisition, the Power division has now become the biggest division in terms of revenue. Investors will be looking to see if the large backlog of heavy duty gas turbines is still on track to be shipped by year end. Again, this is what will be expected here, so any reduction here on guidance will affect the share price negatively. Synergies from the Alstom deal have been slow to play out. $1.1 billion in total synergies for 2016 has been the figure touted, but we are nowhere near that number yet.
If these synergies don't materialize and quickly, General Electric's operating margins in this division will continue to be adversely affected. Furthermore, guidance for the fourth quarter will be crucial here as this will be the first quarter where GE will have to include Alstom's sales in its numbers (as the acquisition will be 12 months old). Alstom's margins in power were under 5% in the second quarter. Moreover, though the backlog is heavily loaded, orders in the power division were down 16% over the same quarter of 12 months prior. Investors will also be looking for an improvement here.
Can Margins In Aviation Grow Again?
Aviation looks really strong from a margin point of view (operating margins easily surpassing 20%+ already this year). Therefore, investors will be looking for solid order growth here despite the division's current backlog of $150 billion+. GE has some pretty lofty expectations for service revenue growth in the years ahead. However, even if the company doesn't hit its engine sales quotas, service revenue is projected to increase substantially in the years ahead, which will spike operating margins even more. Guidance on the company's development of the Turboprop engine, and more importantly, information on recent acquisitions (Arcam & SLM Solutions) will be crucial for investors when the company announces its earnings.
Orders And Backlog Numbers Key In Aerospace
The recent acquisitions of the two European additive manufacturers could help GE deal with the large back-log of engines it has on its books at the moment. 3D printing technology has already borne fruit for the company (Leap fuel nozzle), so GE will be hoping new breakthroughs can happen quickly in this area. All the market wants to see here is a predictable trend of rising sales in this division. 3D printing means less parts which would mean faster production and less maintenance. Again guidance here will be crucial for shareholders and the market alike.
A Dividend Increase Would Be A Nice Tonic To Get Investors Interested
With many long-term investors probably still under water on their GE stock, commentary on the dividend will continue to keenly tuned into. The dividend has been static at $0.23 per share for the last six quarters and shareholders will be looking for guidance on an increase. The CEO Jeff Immelt stated at the end of Q2 that $26 billion would be returned to shareholders in the form of dividends and buybacks in 2016. The pay-out ratio is out of whack at present due to ongoing restructuring, but when we take into account the reducing debt load plus the potential of higher guidance from the company's Aviation & Power divisions, then the dividend should finally be increased in 2017. In fact, now that practically all of the finance wing has been divested off, GE will hold $19.4 billion in short-term debt and $70.1 billion in long-term debt when GE capital is eliminated. This is low by historic comparisons, which is why the company may indeed expand its balance sheet and take on another $20 billion in debt. Shareholders want cash returned to them. Again the management will have to be tactful in its speech here, as it tries to marry future growth potential with shareholder returns.
To sum up, GE has it all to deliver in its third earnings release for fiscal 2016. Power and Aviation will be the protagonists but shrewd investors will be observing margins, orders, backlog and guidance. Commentary on ongoing share buybacks and the dividend will be important as shareholders are running out of patience for this long-awaited dividend increase.
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