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GE Earnings Preview: Can Restructuring Revive a Struggling Company?

Wednesday, October 19, 2016 7:17
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(Before It's News)

GE logoFrom Zacks Research: Industrial goods manufacturer General Electric Company (GEAnalyst Report) is scheduled to report third-quarter 2016 results before the opening bell on Oct 21, so let’s take a look at the factors that could lead to a beat or a miss.

In the last reported quarter, General Electric’s operating earnings exceeded the Zacks Consensus Estimate by 5 cents. Over the trailing four quarters, General Electric delivered an average positive earnings surprise of 9.5%, successfully beating the estimates thrice. Let’s see how things are shaping up for this announcement.

Key Factors in the Third 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. At the same time, it is actively focusing on strategic acquisitions to augment its position in the core markets and improve top-line growth.

In accordance with this strategy, GE Digital acquired Meridium, Inc., a global leader in asset performance management (APM) software and services for asset-intensive industries. The acquisition will facilitate GE Digital to augment its comprehensive APM offering by leveraging Meridium’s expertise in cognitive analytics, reliability centered maintenance, operational risk management and asset health, as well as intelligent asset strategies.

GE Digital will utilize its Predix platform along with Meridium’s enterprise software solutions to improve the APM offering through advanced asset-centric analytics, industrial software and value-added services. This will enable it to boost the Industrial Internet for asset-centric industries such as oil & gas, power and chemicals, in order to maximize the availability of their industrial assets at lower operational costs and risks.

GENL ELECTRIC Price and EPS Surprise


The company also announced plans to acquire Arcam AB and SLM Solutions Group AG, two leading suppliers of additive manufacturing (also called 3D printing) equipment, for $1.4 billion. The twin acquisitions will augment its existing material science and additive manufacturing capabilities as it expects to grow the new additive business to $1 billion by 2020 at attractive returns.

In addition, GE Transportation acquired ShipXpress, a premier provider of cloud-based software solutions, for an undisclosed amount. The deal is likely to expand General Electric’s Transportation portfolio and enrich its human capital as it will gain nearly 200 industry, technical, and software development experts who have been providing their services to ShipXpress. The amalgamation of ShipXpress’ innovative software products and General Electric’s advanced sensing technology will further help enhance the Predix platform of the latter.

During the third quarter, General Electric further completed the divesture of the majority of GE Capital’s restaurant franchise financing assets in the U.S. The assets were sold to three separate buyers. The transactions included about $1.3 billion in ending net investment (ENI).

Since Apr 2015 till the end of Sep 2016, GE Capital inked sale agreements worth approximately $192 billion in ENI, of which it has already completed deals worth $172 billion. By and large, as the business units are performing assets, they have been selling on par and often above par. Also, there is significant demand for these assets from financial firms that have very few solid buying opportunities.

The transactions are in conformity with the corporate strategy of building a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to comprise over 90% of its total operating earnings by 2018, up from 58% in 2014.

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 positiveEarnings 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 -3.23%.

Zacks Rank: General Electric’s Zacks Rank #3 when combined with negative 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.

General Electric Company (NYSE:GE) shares rose $0.11 (+0.40%) to $29.09 in Wednesday morning trading. Year-to-date, GE has fallen 6.61%, versus a 4.83% gain in the benchmark S&P 500 index in the same period.

This article is brought to you courtesy of Zacks Research.

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