Higher Airplane Engine And Oil & Gas Equipment Shipments Will Likely Lift GE’s Results

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General Electric

General Electric (NYSE:GE) will announce its third quarter results Friday, October 17. The industrial conglomerate is coming off a good first-half in which its revenue and profit rose at healthy rates as higher airplane engine deliveries and oil & gas equipment shipments outweighed weakness from the global mining sector and a smaller GE Capital. The company derived additional gains from its cost cutbacks, which further boosted its profit growth in the first-half. In the third quarter, we anticipate these trends to continue with GE likely to post higher revenue and higher profit, compared with the same period last year.

We currently have a stock price estimate of $28.33 for GE, approximately 15% ahead of its current market price.

See our complete analysis of GE here

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Aviation And Oil & Gas Will Likely Lift GE’s Q3 Top Line

At the start of 2014, GE set itself a target of 4-7% industrial organic sales growth and 10% industrial profit growth. And in the first-half of the year, the company stayed on track to achieve these targets, posting 6% industrial organic sales growth and 10% industrial profit growth. [1] This solid growth in GE’s industrial business was driven by its aviation and oil & gas segments, which together constitute nearly 40% of its overall industrial revenue.

In aviation, as airplane makers such as Boeing (NYSE:BA) and Airbus are hiking their production rates, shipments of jet engines manufactured by GE are rising. At the same time, the company’s revenue from engine servicing is also rising driven by the growing worldwide fleet of commercial airplanes. These higher engine shipments to original equipment manufacturers and higher revenue from engine servicing lifted GE Aviation’s revenue and profit by roughly 15% annually in the first-half of 2014. [1] In the third quarter, we anticipate this segment to continue to post double-digit growth in its revenue and profit. (See Is The Global Commercial Aviation Upcycle Nearing Its End?)

In the oil & gas sector, with rising demand for energy from the emerging countries, sales of oil & gas drilling equipment from GE’s oil & gas segment is rising. In the first-half of 2014, driven by this trend GE’s oil & gas revenue and profit rose by over 20% annually. [1] With a huge backlog and scheduled delivery timelines, we figure the growth momentum in this segment will be retained in the third quarter. (See Can GE Continue To Grow Its Oil & Gas Business?) Together, these two segments – aviation and oil & gas – will likely drive the bulk of GE’s industrial growth in the third quarter.

However, this solid growth from aviation and oil & gas segments will likely be tempered by lower sales from GE’s transportation segment, which apart from manufacturing locomotives is an equipment supplier to the global mining sector. With fresh investments in the mining sector continuing to remain weak, GE’s equipment sales to this sector will likely remain soft in the third quarter. Separately, other GE industrial segments including healthcare, energy management, and appliances & lighting will likely also post flat-to-lower revenue in the third quarter.

Results from GE’s finance segment, which is expected constitute about 40% of the company’s overall earnings in 2014, will likely also continue to decline in the third quarter. This is so because GE has continued to shrink GE Capital, resulting in lower loan and lease revenue from the segment. All in all, we figure GE will likely post moderate top line growth driven by aviation and oil & gas segments, partially offset by a few other industrial segments and GE Capital.

Cost Cutbacks Will Likely Boost GE’s Q3 Profit Growth

On the margin front, we will be noting the cost reduction which GE is able to achieve in the third quarter. At the start of the year, the company committed itself to slashing $1 billion from its structural costs through headcount reduction, plant consolidation, and removal of excess enterprise resource planning systems. In the first-half of this 2014, the company was able to take out $382 million from its structural costs. [1] [2] So, GE has a huge cost-out left to achieve in the third and fourth quarters. We figure this cost reduction is essential for profit growth, as the current macro environment in many of GE’s industrial businesses is not conducive for revenue growth. So, additional gains from these cost cutbacks will play a key role in growing GE’s third quarter profit, and we will be noting the cost-out that the company is able to achieve in the third quarter.

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Notes:
  1. GE’s 2014 Q2 earnings form 8-K, July 18 2014, www.ge.com [] [] [] []
  2. GE’s 2014 Q1 earnings form 8-K, April 17 2014, www.ge.com []