- Revenue missed expectations primarily due to poor oil and gas revenues once again.
- The Alstom acquisition is finally gaining traction with backlog and key customer growth. More synergies expected here in the fourth quarter.
- Total orders (helped by better performance in organic orders) increased by 16%. The stock is cheap when compared to projected future earnings.
General Electric (NYSE:GE) reported its fiscal third quarter earnings on the 21st of October, and it was a mixed bag in my opinion. The conglomerate actually beat earnings estimates, reporting $0.32 per share, against $0.30 expected, but missed on its top line performance. In fact, revenues came in at $29.3 billion, which was $300 million shy of what analysts were expecting. Furthermore, the lower than expected third quarter top line resulted in the company reducing its top line guidance for the year. General Electric now expects to report organic revenue growth of 0 to 2% for 2016, which is down from the 2 to 4% range initially guided. The top line guidance reduction did not come as a surprise to me, after a poor start to the year.
I explained this in a recent article where I discussed what the company would need to do to achieve its 2016 guidance. Nevertheless, after a swift sell off in the stock at the open on Friday the 21st, the share price nearly recovered all its gains before the close which illustrated to me that there is still a healthy level of confidence behind this stock. I still maintain that this stock is an attractive long term holding for reasons I discussed here. Let's go through the fine details of its latest earnings report and why investors should pick up this stock especially if it trades lower in the near term.
Source : StockCharts.com
The Oil & Gas Division Will Not Remain This Weak Indefinitely
First of all, the company's oil and gas revenues were down 25% compared to the same quarter of 12 months prior. This division due to the slump we have had in energy is largely outside the company's control. Oil & Gas made up $3 billion of the company's $29 billion+ quarterly take which is disappointing considering the investment that has been ploughed into this area in recent years. However, I am bullish on the long term price of oil and remain convinced that crude oil will return to at least its long term average of $72 a barrel. Investors should remember that the market is basically expecting nothing from this division over the next few years due to GE meaningfully lowering its growth outlook.
Synergies Finally Beginning To Come Through From Alstom
Furthermore, it was good to finally see some meaningful synergies come out of the Alstom acquisition ($850 million). The company announced on the earnings call that more synergies should come in the fourth quarter which sounds encouraging. Investors need to look at the big picture here. Although Alstom only contributed $0.01 in earnings to Q3's bottom line, the backlog has now increased to $32 billion, which is over $3 billion more than when GE took control of the company last November. Furthermore, orders came in at $12.7 billion for the quarter as new key clients were signed up by the company. I acknowledge that the earnings number looks very poor from a margin point of view as Alstom revenues came in at $9.2 billion for the third quarter. However, investors have to look at the long-term picture here. In fact, GE is guiding between $0.15 to $0.20 in earnings per share, exclusively from Alstom in 2018. I foresee GE significantly increasing the service revenue from Alstom's robust top line which will make a big impact on the company's earnings due to the higher realized margins the company derives from service contracts.
Plenty Of Cash To Reward Shareholders
In terms of rewarding shareholders, GE announced that an additional $4 billion would be added to the buyback program. I acknowledge that many investors would have preferred a dividend increase but I see a substantial one coming in 2017. Buybacks are a good play right now as earnings per share will increase, which should consequently move the share price accordingly. However, a reduction of the shares is not going to be the principle driver of this company going forward. Its going to be orderly growth and the fourth quarter of this year should (with 4% organic revenue growth guided) get the ball rolling towards the CEO's target of $2.00 operating earnings in 2018.
GE is Expected To Grow Earnings By 12% In 2017. I Believe This Growth Is Not At All Priced In
This is really the crux of the issue here. GE is expected to do up to $2.00 in earning per share in 2018. If we look at the chart below, we can see that the last time this company managed to pull in these types of earnings, the share price was well north of $34 a share. This is the range I believe this stock will at least get back to. Why? Well, just look at the company's core divisions.GE Power reported almost a 40% increase in the third quarter with aviation going up by 5%. GE also reported a strong quarter in healthcare (5% growth) and the digital and software division continues to go from strength to strength. I just believe the company is in much better shape than it was in 2006 due to the return to its industrial roots.
To sum up, GE stock (although having reduced its 2016 organic sales growth guidance) is still an attractive long term dividend play. Why? Well, shareholders are about to get at least a 6 to 8% dividend increase early next year. Furthermore, the stock is still undervalued when you look at its long-term earnings projections. I maintain my assertion that if the GE stock price drops more, start scaling into it aggressively.