General Electric Company (NYSE:GE) has missed earnings estimate only once in last 26 quarters.
Boston, Massachusetts-based industrial giant General Electric Company (NYSE:GE) is scheduled to report its first-quarter 2017 earnings on Friday, 21st April before the market opens. GE has had a rough 2016 with revenues and margins coming under pressure. While GE certainly did not earn any prizes for execution overall, headwinds in the oil & gas segment were mainly to blame for its poor performance. Shares of GE have lost 4% in last one year and are down almost 6% YTD, widely underperforming the S&P 500 (INDEX:SPAL) which has returned more than 10% in the last one year. GE stock has erased most of the post-election gains. GE stock had rallied more than 10% after the elections through mid-December on the hopes that President Trump's infrastructure plans and loose environmental policies will greatly benefit General Electric Company. The exuberance has cooled down since then.
General Electric Company stock hit by controversies.
Apart from the headwinds facing the oil & energy sector, GE stock has also been roiled by the controversies surrounding the accounting policies and GE's payment structure. Deutsche Bank has questioned the way GE has accounted for its Alstom acquisition while others are pointing fingers at GE's non-GAAP numbers.
On the performance and payment front, activist shareholder Nelson Peltz had been ratcheting up the pressure on General Electric Company. Trian who took a stake in GE in 2015, now worth about $2 billion, has been demanding that executive pay be linked to performance measures. After talks with Trian, GE agreed to cut costs and link bonuses to operating performances. GE will cut this year's costs by $1 billion to $23.9 billion, and another $1 billion in 2018. General Electric Company also linked bonuses to a target of $17.2 billion in operating profits in its industrial units this year.
Executive bonuses will drop by 20 percent if the company doesn’t meet its target for $17.2 billion in industrial operating profit this year and falls short of the new target of lowering “base costs” by $1 billion to $23.9 billion. On the other hand, the bonus payouts will increase by 20% if GE manages to achieve both the targets. Given the incentive for managements to cut costs, investors should watch out for the quality of the cuts.
Slashing costs heavily in areas such as research and development could impact future growth potential. To quote JPMorgan’s C. Stephen Tusa and team," we are scratching our heads around how the company can find $1 B of incremental savings without extra restructuring, and view the outcome here as a “show me” as these programs have historically not lead to higher quality earnings, which we define as being supported by FCF". GE needs to balance between taking out cost and investing for growth. On the whole though, the new performance-linked bonus plan is positive for GE stock.
What to expect from General Electric's Q1 earnings?.
Analysts expect General Electric Company to report an EPS of $0.17 on revenues of $26.41 billion. The EPS estimate represents a 20% YoY decline, while revenue estimates indicate a 4.3% YoY decline. Revenue estimates were $27.3 billion in December but have trended down since then. GE has a pretty strong earnings record. General Electric has missed earnings estimates only once in past 26 quarters. It is likely that GE will extend its record in this earnings season.
Apart from the earnings, investors should also watch out for the industrial division's profit margins. Industrial margins have been under pressure lately. Analysts expect GE to achieve an operating margin of 10.2% in Q1 2017, which represents a 360 basis points decline on a year-over-year basis. However, analysts expect the company’s operating margin to expand over the next four quarters. GE's push towards additive manufacturing should help it to expand its operating margins in the quarters to come. Also, Trian recently pressured the management into factoring in the company's industrial operating profit target for the calculation of year-end bonuses, which should help. GE's management has a target of $17.2 billion in industrial operating profit this year.
Then there is the oil & gas segment which was the main reason behind GE's disappointing performance in 2016. The downturn in the industry has had a significant impact on the results for this business unit. Oil and Gas segment revenues have declined from $19.08 billion in 2014 to $12.9 billion in 2016 while the profits have halved from $2.75 billion in 2014 to $1.39 billion in 2016. However, this earnings report may bring some positive news. Oil prices have recovered from their lows and oil &gas equipment orders finally turned positive in the fourth quarter of 2016.
Should you buy General Electric Company stock?
GE stock has underperformed the broader market by about 10% this year. GE stock is currently testing the 50-day moving average. Since the beginning of March, GE stock has been facing strong resistance from the 50-day moving average. The 50-day moving average is likely to continue acting as a resistance going into earnings. However, GE's long-term prospects look good. General Electric (NYSE:GE) stock currently enjoys a buy rating from wall street with an average price target of $33.34, more than 10% upside from current price. Analysts are banking on GE’s digital industrialization drive. Bernstein analysts Steven Winoker says the company is worth $38 a share due to its cash and earnings growth prospects.
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