North America

Earnings Preview: General Electric Q1 2017 (GE)

By: Craig Bowles

Overview

General Electric Company (GE) is slated to report 1Q 2017 earnings before the bell on Friday, April 21st. Results are typically released at 6:30 a.m. ET and will be followed with a conference call webcast available through GE Investor Relations at 8:30 a.m. GE’s earnings are often viewed as a barometer on the overall health of the U.S. and global economy. Therefore, GE has the potential to influence broader markets, including the index futures, currencies, and other broad market indicators, particularly if the results are far outside the band of consensus estimates. This is the most complicated earnings release in the U.S. The Non-GAAP revenue value that analysts model for normally requires a calculation from numbers only found in the “presentation” document. Media reports often incorrectly refer to total revenue shown in the press release when comparing to consensus.

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Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS): (calculated using verticals + horizontals in presentation document but sometimes included in the press release and/or earnings supplement) Analyst consensus is $0.17 (range $0.16 to $0.18). (Source: Yahoo! Finance) Consensus was $0.29 three months ago.
  • Revenues: (verticals + horizontals in presentation document have to be calculated) Analyst consensus expectations for a 4.3% Y/Y decline to $26.41 bln (range $25.71 bln to $27.10 bln).
  • Adjusted Earnings Per Share (EPS) Guidance (FY 2017): Guidance is currently $1.60 to $1.70. Analyst consensus is for $1.63.
  • Price/Sales of 2.2 compares to the 5-year average of 1.9. Price/Book of 3.4 compares to the 5-year average of 2.2. The stock yields 3.2% compared to the 5-year average 3.1%.
  • Analysts view GE with 11 Buy, 6 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 473,987 shares over the last three months and a net 703,559 shares in the past year. (source: NASDAQ.com) On April 10, 2015, GE approved a $50 billion stock buyback and added $4 billion on October 21, 2016.
  • GE shares have a 1-day average price change on earnings of 1.29%. Options are pricing in an implied move of 2.14% off earnings.

Recent News

  • 04/03: Barclays expects GE’s Q1 earnings to be “meaningfully better” than fourth-quarter earnings and margins will be solid. GE probably should have been broken up many years ago but accounting problems and sluggish earnings growth are already priced in, according to a post at Barron’s.com.
  • 03/31: Bernstein reiterated an Outperform rating on GE while noting the relative underperformance of the stock this year as a sign that the “hyenas are close and vultures are circling”, according to a post at Barron’s.com.
  • 03/28: JPMorgan contends that bullish investors are now focusing on GE’s free cash flow, an “emerging bull case” they call “overstated and not plausible,” according to a post at Barron’s.com.
  • 03/22: GE will link bonuses to cost-cutting targets after pressure from Nelson Peltz’s Trian Fund Management, according to a post at com.

Technical Review

GE shares have trended higher since the financial collapse. The stock traded above $60 in July 2000 and $40 in 2007, so cyclical highs have been progressively lower with each boom followed by a $30 bust. The stock price has fluctuated mostly between $28 and $32 since late in 2015. Before that it was two years in the mid-$20s, so there’s nice support if needed. (Chart courtesy of StockCharts.com)

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Summary

General Electric’s sluggish earnings growth and creative accounting has encouraged bearish bets but the bullish side argues the downside is already priced in and the stock could show 5% upside if the CEO resigns. Whether the Baker Hughes deal is a positive or negative is hotly debated, as well. Analysts are even more positive. Insider selling picked up the past three months. GE beat estimates by an average of 2c the last four quarters. Estimize consensus for an adjusted EPS of $0.19 on revenue of $26.656 bln compares to analyst consensus of $0.17 on revenue of $26.41 bln. 2017 Any change in guidance would be important, as well. The stock has struggled after beating estimates in each of the past four quarters partly because of the confusion around which numbers to compare to analyst estimates.

 

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