GE Prepares For Impact From Lower Oil Prices Even As Aviation Lifts Profit

General Electric (NYSE:GE) is cutting costs at its oil and gas segment as the recent fall in crude oil prices has impacted the company’s orders. In the fourth quarter, orders at GE’s oil and gas segment fell by 10% annually as energy companies slashed their investment in new equipment and machinery. GE is one of the largest suppliers of oil and gas drilling machinery, and this business constitutes about 15% of the company’s total industrial earnings. So, the decline expected in this business in 2015 will temper growth from other businesses such as aviation. In the fourth quarter, GE’s oil and gas revenue fell by 6% annually, and the company expects a greater impact in 2015 from weak oil prices. ^[1] To temper this impact from weakness in its oil and gas segment, GE is cutting costs at this segment through headcount reduction and restructuring. We believe that, despite the downturn in GE’s oil and gas business, it will do fine in 2015 on growth from the U.S. economy and upcycle in global commercial aviation.

These growth drivers also lifted GE’s fourth quarter results, despite oil weakness. Profit from GE’s aviation and transportation segments rose in double-digits in the fourth quarter, driven by higher aircraft engine and locomotive shipments, respectively. Additional gains from cost cuts expanded GE’s operating margin, boosting its bottom line growth. In all, GE achieved the key growth targets that it set out at the start of 2014. The company managed to grow its industrial operating profit by 10% year-on-year and its industrial organic sales by 7% year-on-year, in 2014. It could also take out $1.2 billion from its structural costs, exceeding its $1 billion target, through cost reduction measures, which included plant consolidation and removal of excess enterprise resource planning (ERP) systems. ^[1]

For the current year, after taking into account the slowdown in the oil and gas sector, GE is aiming to grow its industrial organic sales at a more modest rate of 2-5% annually. ^[2] The company plans to support this top line growth with cost cutbacks, aiming to grow its industrial earnings by double-digits in 2015.

We currently have a price estimate of about $28 for GE, around 10% ahead of its current market price.

See our complete analysis of GE here

Aviation Lifts GE’s Fourth Quarter Results

GE’s aviation profit rose by 12% annually in the fourth quarter, as shipments of jet engines to airplane manufacturers – Boeing and Airbus – grew. ^[1] These two airplane makers are hiking their production rates in response to the growing global demand for new airplanes. At the same time, GE Aviation’s revenue from jet engine servicing is also rising, driven by an expanding worldwide fleet of commercial airplanes. Aviation segment constitutes nearly 30% of GE’s total industrial earnings, so solid growth from this segment played a key role in lifting GE’s fourth quarter results.

In addition, rising rail traffic is lifting GE’s locomotive sales. This trend raised the company’s transportation segment profit by 13% annually in the fourth quarter. In all, GE took 1,355 locomotive orders in 2014, positioning itself for record shipments in 2015. ^[3]

Separately, steady recovery in the U.S. economy grew GE’s healthcare equipment orders from the country by 17% during the quarter. ^[3] This growth from aviation, transportation and healthcare raised GE’s overall backlog to $261 billion at the end of 2014, despite the decline in its oil and gas backlog. Strength from aviation, transportation and healthcare segments gives us confidence that GE could grow its results in 2015, despite weakness in its oil and gas business. GE expects its 2015 earnings to lie around $1.70-1.80 per share, up from $1.51 per share in 2014. ^[2]

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1. GE’s 2014 Q4 earnings form 8-K filing, January 23 2015, www.ge.com [↩] [↩] [↩]
2. GE’s 2014 Q4 earnings presentation, January 23 2015, www.ge.com [↩] [↩]
3. GE’s 2014 Q4 earnings transcript, January 23 2015, www.ge.com [↩] [↩]