GE beats Q2 2017 estimates, reaffirms FY17 EPS view

Despite beating fiscal 2017 second-quarter estimates of analysts, the stock of General Electric Company (NYSE: GE) declined to hit a 12-month low of $25.26. The 45% y-o-y decline in the quarterly earnings was primarily responsible for the weakness in the stock price. Additionally, the company also issued a poor fiscal 2017 outlook. Still, we expect the stock to remain range bound with a moderate bullishness in the short-term due to reasons discussed below.

The diversified industrial behemoth reported Q2 2017 revenues of $29.558 billion, down 12% from $33.494 billion in Q2 2016. The Wall Street analysts anticipated revenues of $29.015 billion for the second-quarter.

Excluding preferred stock dividends and other charges, the Q2 2017 net income of $1.185 billion, or $0.13 per share, was lower than $2.756 billion, or $0.30 per share, reported in Q2 2016.

General Electric

The Q2 non-GAAP earnings were $2.418 billion, down 48% from $4.684 billion in the year-ago period. On a per share basis, the Q2 2017 earnings of $0.28 were lower than $0.51 per share in the corresponding quarter last year, but surpassed analysts’ estimates of $0.25 per share.

Segment wise, Power and Renewable Energy revenues increased 5% and 17% to $6.97 billion and $2.46 billion, respectively. However, the gains were more than offset by Transportation and Energy Connections revenues, which declined 14% and 27% to $1.07 billion and $3.21 billion, respectively. The Energy Connections division provides electrification and automation products to the mining, oil and gas, marine, and utility industries.

Cash flow from operations increased 12% y-o-y to $3.215 billion. Likewise, the Industrial cash flow from operations, excluding taxes and pension plan funding, increased to $1.467 billion, from a mere $65 million last year. GE anticipates cash flow to increase through the rest of the year. The company is also on track to reduce Industrial structural costs by as much as $1 billion in 2017. GE has already achieved savings of about $670 million.

GE reaffirmed its FY17 operational cash flow guidance of between $12 billion and $14 billion. However, the company stated that the full-year adjusted earnings would likely be near the bottom of the previous guidance of $1.60 to $1.70 a share. The Wall Street analysts are forecasting earnings of $1.62 per share. Next month, the company would see a change of baton when John Flannery replaces the current CEO Jeff Immelt.

The stock is currently trading at a forward PE ratio of 15.9, while the historic average is about 19.9. The equity research firm CFRA has issued a “hold” rating for the stock with a target price of $27.

Thus, considering the reconfirmation of FY17 operational cash flow and earnings per share guidance, fundamentally, the stock is forecasted to remain range bound with a short-term bullish bias.

The historic price chart indicates strong support for the stock at 25.50. The stochastic indicator is rising out of the bearish zone. Additionally, there exists a gap between 26.57 and 25.99. Thus, we anticipate the stock to appreciate and cover the gap in the short-term.

To gain from the probable uptrend, we intend to invest in a call option valid for a period of one week. A strike price of about $25.80 is preferred for the trade.

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