GE CEO John Flannery
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General Electric’s (GE) Q3 earnings did not go well. The company reported revenue of $33.5 billion and earnings of $0.29 per share. The company beat on revenue by $910 million but missed on earnings. The stock was off 6% in the pre-market. Below is my take on the quarter:

GE Lacked Power

GE’s top line grew by 10%. The results were misleading as Oil & Gas revenue was up 81% on the strength of its merger with Baker Hughes (BHGE). If you muted Oil & Gas revenue growth then total revenue growth would have been flat. GE has been treading water for a while now. Q2 revenue was down 2% Y/Y, and this followed a 1% rise in Q1.

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Equipment orders were down 10% organically. Lower gas and steam orders from Power were slightly offset by improvements in Oil & Gas, Aviation, Transportation and Healthcare. Services growth of 10% was broad-based. Another bright spot was digital orders, which were up 50%. GE has made a big push into digital and it appears to be paying off. Overall, if GE’s industrial segment is a reflection of the global economy then it could be tough sledding for GE and many others going forward.

Segment Profit Off 10%

GE’s segment profit of $3.9 billion was also off 10% Y/Y. The company’s profit margins fell 90 basis points, driven by Power (down 700 basis points) and Oil & Gas (down 760 basis points). Heading into the quarter I expected Oil & Gas to be a stalwart given the added scale, exposure to the white hot North America land drilling and potential cost synergies provided by Baker Hughes. Merger integration issues might have impacted the unit. I would expect margins to improve going forward, particular in land drilling where GE’s legacy business and Baker Hughes’s operations had overlap.

These profit margin figures also excluded over $200 million of restructuring charges that impacted Oil & Gas. All other segments experienced margin improvements of 250 basis points. That said, margin declines in Power could portend declining pricing power that could hit other segments if the global economy stalls again.

Lowered Outlook

GE slashed its earnings outlook for the rest of 2017. Adjusted earnings are expected to be $1.05 to $1.10 per share, down from a previous range of $1.60 to $1.70. The mid-point of its new earnings estimate ($1.08) is lower by about 35% compared to the previous mid-point. The fact that it lowered its full-year outlook could imply that Q3 was not an anomaly.

Conclusion

There could be more pain ahead for GE despite potential for margin improvement in Oil & Gas. GE remains a sell.

 

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