GE misses Q3 EPS estimate on huge impairment charges

The stock of the world’s largest producer of jet engines, General Electric Company (NYSE: GE), plunged to a new 12-month low of $22.10, after reporting a y-o-y decline in the fiscal 2017 third-quarter earnings that missed analysts’ estimates by a wide margin.

GE also made a deep cut to its fiscal 2017 adjusted earnings outlook.

However, considering the increase in the quarterly revenue that beat analysts’ estimates, and the restructuring plans being implemented currently, we anticipate a recovery in the stock’s price.

The Boston, Massachusetts-based company reported Q3 2017 revenues of $33.472 billion, up 14% from $29.266 billion in Q3 2016. The net earnings in the September quarter 2017 were $1.800 billion, or $0.21 per share, down 10% from $1.994 billion, or $0.22 per share, in the year-ago period.

General Electric

Excluding restructuring charges, among others, the Q3 2017 non-GAAP Industrial operating earnings and Verticals earnings were $2.550 billion, or $0.29 per share, down 11% from $2.870 billion, or $0.32 per share, in the corresponding quarter of 2016. The Thomson Reuters Consensus estimate had called for earnings of $0.49 per share on revenues of $32.56 billion.

The Power segment recorded 4% y-o-y increase in revenues to $8.679 billion. Renewable energy generated revenues of $2.905 billion, up 13% from last year. Oil & Gas revenues jumped 21% to $5.365 billion. The successful merger of GE’s Oil & Gas division with Baker Hughes is mainly responsible for the strong growth in revenues. While the Aviation division grew by 6% to record a revenue of $6.82 billion, Healthcare revenue rose 4% to $4.724 billion. The Transportation segment reported revenues of $1.072 billion, down 8% from last year.

Despite reporting a revenue growth in all the business segments, except Transportation & Lighting, General Electric was unable to improve its earnings and beat analysts’ estimates. The main reason for that is the impairment charge of $0.13 and restructuring charge of $0.03. Further, the adjusted Industrial margin decreased 220 basis points to 11.8%.

The company is undertaking measures to cut costs. In this regard, GE has saved $500 million in Industrial costs, during the third-quarter. So far this year, the company has cut costs by $1.20 billion. GE has also set a goal to cut $1 billion in costs in 2017 and 2018. That was stated by the new CEO John Flannery, while explaining his restructuring plan. Flannery also announced the decision to divest $20 billion of non-core assets in the next two years.

Considering the restructuring and divestment process, and headwinds faced by the company, Flannery lowered the fiscal 2017 cash and earnings per share outlook. GE now expects cash flow from operating activities of $7 billion, down from the previous guidance range of $12 billion to $14 billion. The outlook was trimmed on the basis of poor expectations from the Power division, which is involved in the manufacturing of turbines for power plants.

GE also trimmed its adjusted 2017 earnings per share outlook to a range of $1.05 to $1.10, from the prior outlook range of $1.60 to $1.70. The Street Consensus currently stands at $1.53 per share. The FY17 core EPS view was slashed to a range of $1.05 to $1.10 per share, from the earlier estimate of $1.60 to $1.70 issued three months ago.

The forward PE ratio of GE had fallen to 13.6 and will certainly attract value investors considering the $328 billion backlog at the end of September 2017 and revenue growth in all the major segments. Thus, we forecast a short-term upswing in the stock of GE.

The stock has bounced off a strong support at 21.50. Further, the stock is positioned at a considerable distance from its 50-period linear weighted moving average. The stochastic oscillator is also in the oversold zone. Thus, we forecast a short-term recovery in the stock price.

We are planning to place a bet on a call option offered by a reputed binary broker. The investment will be made only if the stock is trading near $22 in the NYSE. Further, the option should remain active until November 2nd.

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