GE Earnings Preview: Oil & Gas Expected to Remain Slow, Aviation, Healthcare and Transportation to Push Overall Growth

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General Electric

General Electric (NYSE:GE) will announce its first quarter earnings for 2015 on Friday, April 17. The industrial conglomerate is coming off a modest overall performance in the fourth quarter of 2014. Higher revenues in aviation and transportation offset the fall in revenues in both oil and gas and energy management segments in Q4 2014. Healthcare revenues remained relatively flat, and power and water as well as appliances saw a revenue boost.

In Q1 2015, we expect GE’s aviation, healthcare and transportation businesses to drive growth in its results. We believe that this growth will be partially offset by the oil and gas segment’s continually falling orders. We note as well that GE announced its intention this week to divest most of GE Capital so as to focus on its core industrial businesses. [1]  We therefore will focus on the retained businesses.

We currently have a price estimate of about $28 for GE, approximately in line with its current market price.

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See our complete analysis of GE here

Industrial Business, Particularly Aviation, Will Drive Growth

GE’s aviation segment displayed strong demand in Q4 2014 as the overall aviation industry experienced growth. Reduced jet fuel costs along with increasing revenue passenger kilometers over this quarter justified the rise in demand for new airplanes globally. Airplane manufacturers such as Boeing and Airbus hiked up their production rates. Consequently, GE witnessed a 15% rise in aviation orders, as shipments of jet engines to airplane manufacturers grew. Servicing revenues related to jet engines also saw a rise. [2]

Through the first quarter of 2015, the aviation industry continued to sustain similar trends as oil prices remained under $60 per barrel. [3] Lower oil prices translate to lower operating costs and higher margins for airlines, giving them the opportunity to invest in new equipment. We hence anticipate that the aviation segment likely saw a 10-15% rise in orders in Q1 2015, resulting in segment revenue growth of over 5%. Since the aviation segment constitutes 30% of GE’s total industrial earnings, solid growth in this segment will play a key role in the overall results for Q1 2015.

Global health spending has been witnessing an accelerated increase since 2014. It is anticipated that over the next three years, as the global economy recovers from a prolonged recession, health spending will continue to remain accelerated, rising at about 5.2% annually, as compared to 2.3% in 2013. [4] In line with industry growth, healthcare orders at GE have been on an increasing trend since the beginning of 2014. They are expected to continue to grow through 2015 as well, as the global healthcare outlook appears strong. We believe that equipment orders likely saw growth of approximately 12-15% in Q1 2015.

In 2014, GE took 1,335 locomotive orders, driven by rising rail traffic, positioning itself for record shipments through 2015. The impact of this will be visible in the first quarter of 2015, driving up revenues and margins for the transportation segment, as well. ((General Electric’s (GE) CEO Jeff Immelt on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha))

Oil & Gas Segment Will Partially Offset High Industrial Revenue Growth

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. In 2014, orders at GE’s oil and gas segment fell by 10% as energy companies slashed their investment in new equipment and machinery, given the falling crude oil prices. ((General Electric’s (GE) CEO Jeff Immelt on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha))

As crude oil prices remained under $60/barrel through the first quarter of 2015, we anticipate GE oil and gas would have witnessed a slowdown in revenue growth as well. In its Q4 2014 earnings call, the company spoke about the impact of crude oil prices on the oil and gas segment. In this call, they stated that they anticipate a greater impact of these low oil prices through 2015. Bearing this in mind, we expect the oil and gas segment to have witnessed a 6-8% decline in revenues in Q1 2015.

The company has been engaging in cost cutting initiatives including a reduction in employee headcount as well as restructuring, to minimize the impact of revenue slowdown on earnings. In the fourth quarter of 2014, the oil and gas segment despite the slowdown witnessed a 6% rise in earnings due to these cost cutting initiatives. [2] As these initiatives continue, and since the anticipated impact of oil prices falling is expected to be greater in 2015, we expect that earnings in the oil and gas segment saw slow growth in lower-to-mid single digits range in Q1 2015.

Overall, strength from aviation, healthcare and transportation gives us confidence that GE will experience growth in Q1 2015, despite weakness in its oil and gas business.

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Notes:
  1. Read “GE Seeks to Exit From Banking Business.” []
  2. General Electric’s (GE) CEO Jeff Immelt on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha [] []
  3. Crude Oil, Trading Economics []
  4. 2015 Global Health Care Outlook, Deloitte []