North America

Earnings Preview: General Electric Q2 2017 (GE)

By: Craig Bowles

Overview

General Electric Company (GE) is slated to report 2Q 2017 earnings before the bell on Friday, July 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.

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 $0.25 (range $0.24 to $0.27). (Source: Yahoo! Finance) Consensus was $0.31 three months ago.
  • Revenues: (verticals + horizontals in presentation document have to be calculated) Analyst consensus expectations are for $29.02 bln (range $28.43 bln to $29.77 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 1.9 compares to the 5-year average of 1.9. Price/Book of 3.1 compares to the 5-year average of 2.2. The stock yields 3.6% compared to the 5-year average 3.1%.
  • Analysts view GE with 9 (11 last qtr) Buy, 8 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insiders bought 138,638 shares over the last three months but sold a net 632,626 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 1.46%. Options are pricing in an implied move of 3.18% off earnings.

Recent News

  • 07/06: JPMorgan sees more downside for General Electric despite its recent change of CEO as there’s no quick fix, according to a post at Barron’s.com.
  • 06/20: Credit Suisse believes General Electric’s aviation business is likely to stick around even the industrial giant’s new CEO starts shedding pieces of the company, according to a post at Barron’s.com.
  • 06/12: Barclays would like to see an AT&T-style breakup of GE, according to a post at Barron’s.com.
  • 06/12: John Flannery, the current president and CEO of GE Healthcare, has been named CEO of the company, effective Aug. 1, and chairman effective Jan.1, 2018, according to a post at CNBC.com.
  • 05/12: Deutsche Bank downgraded General Electric to Sell from Hold and expects a dividend cut. Earnings quality pressures include the exclusion of non-operating pension accounting coupled with a high level of underfunded pension obligations, ultra low tax rates that could pose a future earnings headwind, LTSA non-cash earnings contribution and pro forma quarterly matching of gains against a plethora of charges, according to a post at Barron’s.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 high of this expansion was 2016’s $31.97. The stock price has fluctuated mostly between $28 and $32 since late in 2015. Before that it was two years in the mid-$20s. (Chart courtesy of StockCharts.com)

Summary

CEO/Chairman Jeffrey Immelt is being replaced by John Flannery but the rally analysts had hoped for was fleeting. Whether the Baker Hughes deal is a positive or negative is hotly debated. Analysts lost a couple of bulls and are relatively neutral overall. Insider selling turned to buying the past three months as the stock has sold off. GE beat estimates by an average of 3c the last four quarters. Estimize consensus for an adjusted EPS of $0.25 on revenue of $29.322 bln compares to analyst consensus of $0.25 on revenue of $29.02 bln. 2017 Any change in guidance would be important, as well. The stock has struggled after beating estimates in each of the past five quarters partly because of the confusion around which numbers to compare to analyst estimates.

 

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