Can GE Beat Q4 Earnings With Industrial Internet Focus?

Industrial goods manufacturer General Electric Company GE is scheduled to report fourth-quarter 2016 results before the opening bell on Jan 20. In the last reported quarter, the company’s operating earnings exceeded the Zacks Consensus Estimate by a penny. Over the trailing four quarters, General Electric delivered an average positive earnings surprise of 4.5%, successfully beating the estimates thrice. Let’s see how things are shaping up for this announcement.

Key Factors in the Fourth Quarter

General Electric is continuing with its restructuring initiatives to create a simpler and nimbler firm. From a classic conglomerate with diversified business interests in financial services, media, industrial and technology-based operations, the company is pruning its operating portfolio to focus on core manufacturing businesses with a digital edge.

In accordance with this strategy, General Electric has been selectively acquiring assets to boost its Industrial Internet vision. Such opportune transactions are likely to improve the top line of the company. During the to-be-reported quarter, GE Digital acquired ServiceMax, a premier cloud-based field service management solutions provider, for $915 million. The transaction will enable General Electric to automate and digitize the servicing of heavy-duty machinery as it aims to focus on core manufacturing businesses with a digital edge.

The acquisition of ServiceMax is likely to accelerate the commercialization of the Predix software of General Electric. Predix is designed to add intelligence to the Internet of Things applications. It helps companies to connect their machines, data and people and run industrial-scale analytics. The combination of machine connectivity with a data lifecycle management platform powered by engineering simulation will help diverse firms to design their products for the Industrial Internet in the best way possible. Consequently, the transaction is likely to generate incremental revenues for the company.

General Electric Company Price and EPS Surprise


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

During the fourth quarter, General Electric inked a definitive agreement with Baker Hughes Incorporated BHI to merge its Oil & Gas business with the latter to form an industry leader with an unrivalled mix of service and equipment capabilities. Under the terms of the agreement, GE Oil & Gas and Baker Hughes will form a new entity (the “New” Baker Hughes) using a partnership structure, pursuant to which both the parties will contribute their operating assets to the newly formed partnership. General Electric will own the majority stake of 62.5% in the new company, and the remainder will be held by the erstwhile Baker Hughes shareholders.

With a complimentary portfolio of operating assets and integrated offerings, the new entity will be able to better serve the existing customers of both the companies. Although this multi-billion deal is expected to have minimal effect on the impending quarterly results, it is likely to attract other lucrative businesses for General Electric and improve its top-line growth. Experts widely believed that GE Oil & Gas business lacked product breadth and was losing market share in a few key product lines, leading to increased risk of asset erosion. The strategic deal, therefore, fortifies the beleaguered business to ramp up its operations to fend off competition from rivals.

Although General Electric is taking prudent steps to limit its financial exposure by divesting GE Capital assets, it is still susceptible to various market risks. The company’s objectives of simplification and productivity improvement pose operational execution risks as well. For a company as large as General Electric, the additional revenues needed for growth are quite large, posing a challenge in developing businesses on such a vast scale.

Earnings Whispers

Despite the portfolio restructuring initiatives, our proven model does not conclusively show that General Electric is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: General Electric’s Zacks Rank #3 when combined with 0.00% ESP makes an earnings prediction uncertain. Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Corning Incorporated GLW, with an Earnings ESP of +6.98% and a Zacks Rank #2.

First Midwest Bancorp, Inc. FMBI, with an Earnings ESP of +3.03% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fifth Third Bancorp FITB, with an Earnings ESP of +2.33% and a Zacks Rank #2.

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