GE Increases Full Year EPS Guidance In Light Of Strong Performance

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General Electric

General Electric (NYSE:GE) announced its second quarter earnings for fiscal 2015 on July 17th. The company is coming off a modest first quarter performance where EPS beat analysts’ expectations by a penny a share. GE witnessed impressive growth in its industrial segment in Q2 2015. The company believes that the strong performance will continue through the second half of the year and has consequently decided to raise the lower limit of its industrial EPS forecast for the full year. The revised industrial EPS estimate now stands at $1.13 to $1.20. Overall, Industrial EPS grew by a solid 18%. Combined earnings of industrial and the finance verticals that GE will continue to retain grew by an impressive 19%.((GE – Q2 2015 General Electric Co Earnings Call, July 17th, 2015, General Electric Investor Relations)) Excluding the impact of the stronger dollar, the company witnessed a 13% increase in orders, 11% increase in operating profits and 5% increase in revenues. [1]

General Electric is in the process of divesting its financial services business. Therefore, our earnings analysis is going to be focused on the performance of its industrial division and few relevant financial services verticals that GE will retain at the end of this restructuring. GE Capital’s exit is continuing at great pace. The company is now expecting that $100 billion of GE Capital’s assets will be sold by the end of 2015. [2]

We currently have a price estimate of about $28 for GE, around 6% ahead of its current market price. However, we will be revising this estimate in light of the recent earnings release.

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See our complete analysis of GE here

Six of Seven Segments Reported Organic Growth, Oil & Gas Continued To Remain A Drag On Overall Industrial Performance

The aviation sector showed robust growth in Q2 2015, which will continue to be bolstered by a stellar performance by GE and it’s joint venture partners at the Paris Air Show. The company recorded $19 billion of commitments at the Paris Air Show this year. Orders at GE’s aviation segment were up 30% in the quarter, driven by the roughly three-fold year-over-year increase in the number of GEnx commercial engines ordered in the quarter. On the other hand, the dollar value of total military equipment orders was down 31%. However, military engines are slowly picking up steam again. Number of military engine orders in the quarter increased by approximately 9% on a year-over-year basis. Propped up by commercial engine sales, reported revenues witnessed a 3% year-over-year rise in the quarter.((GE 2Q 2015 Earnings, General Electric Investor Relations)) It is important to note that GE Aviation witnessed a 2% year-over-year decline in revenues in Q1 2015 due to supply-chain disruptions related to the GEnx, highlighting the importance of this commercial engine in GE’s aviation program. Overall segment profits increased by 6%, attributable to strong value gap and base cost productivity. ((GE – Q2 2015 General Electric Co Earnings Call, July 17th, 2015, General Electric Investor Relations))

In 2014, GE took 1,355 locomotive orders positioning itself for record shipments in 2015. [3] The impact of this was visible in Q1 2015 as the transportation segment witnessed a 7% increase in revenues and a significant 11% increase in profits. [4] The impact continued to gain momentum through Q2 2015 as well. The segment reported a 9% increase in revenues and a whopping 23% increase in profits, driven by higher locomotive and parts volumes. The company shipped out approximately 16% more locomotives, amounting to 191 locomotives this quarter compared to 165 locomotives in Q2 2014. [2] Transportation orders in the quarter were down 5% on a year-over-year basis. However, this should not be a point of big concern to investors as the segment’s total backlog witnessed a 32% increase on a year-over-year basis.((GE 1Q 2015 Earnings, General Electric)) This ensures that the division continues to have a strong backlog at the end of Q2 2015.

Power & Water recorded a 22% year-over-year increase in orders over the quarter. Specifically, equipment orders increased by 29% over the quarter. The number of gas turbines ordered increased from 10 to 18 between Q2 2014 and Q2 2015, reporting an increase of 1.8x. Gas turbines sold increased from 21 to 24 between the same time period. Number of wind turbines ordered increased from 715 to 888, a 1.2x increase. Number of turbines sold grew by an impressive 296 units over the quarter on a year-over-year basis. Consequently, the Power & Water segment showed an 8% year-over-year rise in both segment revenues as well as segment profits over this quarter. Excluding the impact of the stronger dollar, profits increased by an impressive 14%. [4] The company expects that Power & Water will continue to show steady performance through the remainder of the year, despite slight challenges in the performance of the distributed power subsegment. ((GE – Q2 2015 General Electric Co Earnings Call, July 17th, 2015, General Electric Investor Relations))

Energy Management witnessed a 5% increase in orders, as reported. However, excluding the impact of currency headwinds, the segment witnessed a 13% increase in orders. The increase in orders was largely brought about due to a 33% rise in Power Conversion orders. The Power Conversion subsegment recorded over $300 million in orders with wind customers.((GE 1Q 2015 Earnings, General Electric)) As illustrated by the number of wind turbines sold above, GE is witnessing increased penetration in the renewable energy market. The company believes that its grew its share by 50% in the renewable energy market through 2014. ((GE – Q2 2015 General Electric Co Earnings Call, July 17th, 2015, General Electric Investor Relations)) However, even as operations within the renewables market is emerging as a growth driver in this segment, the segment also continues to be affected by the slowdown of the oil and gas markets which partially offset the growth in the segment during this quarter. Overall, the segment witnessed a 5% fall in revenues, and operating profit witnessed a strong 19% rise. Organically, revenue increased by 4% and operating profit increased by an extremely impressive 40%. ((GE – Q2 2015 General Electric Co Earnings Call, July 17th, 2015, General Electric Investor Relations))

The healthcare segment was largely affected by the impact of foreign exchange. The segment witnessed a 3% fall in orders, as reported. On a constant currency basis, however, the segment saw a 3% rise in orders in this quarter. Total revenues for the segment were down 3%, however excluding the impact of foreign exchange revenues witnessed a 3% rise. The company signed a crucial contract in Kenya which should support the growth of the segment moving forward. This contract, valued at over $200 million, will be spread out over seven years. Appliances and Lighting segment witnessed a 5% increase in reported revenues largely credited to higher appliance volumes. ((GE 2Q 2015 Earnings, General Electric Investor Relations))

Finally, the oil and gas segment continued to be a drag on overall industrial segment revenues and profit. The segment witnessed a 20% decline in orders and a 2% decline in backlog. Consequently, total revenues were down 15%. Excluding the impact of currency headwinds the decline amounted to 4%. The segment also reported a 12% decline in profits. However, the companies efforts to limit bottom-line impact of the industry slowdown by taking up headcount reduction and proactive restructuring decisions to keep costs low through the first half of the year resulted in organic operating profits showing a 5% rise. ((GE 2Q 2015 Earnings, General Electric Investor Relations))

In summation, General Electric’s strong industrial performance through this quarter is an insight that can be used to form expectations for the future once remainder of GE Capital is divested. The industrial segment has shown overall growth in the quarter with total reported revenues increasing 5% organically, though the reported reported revenues remained flat. The industrial segment also saw a 5% rise in operating profit. Excluding the impact of foreign exchange, operating profits witnessed an 11% rise.((GE 2Q 2015 Earnings, General Electric Investor Relations))  These are all signs that indicate that GE industrial is on its path to grow in the future, even as economic conditions for divisions such as oil & gas remain less than favorable.

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Notes:
  1. GE 2Q 2015 Earnings, General Electric Investor Relations []
  2. GE – Q2 2015 General Electric Co Earnings Call, July 17th, 2015, General Electric Investor Relations [] []
  3. GE’s 2014 Q4 earnings transcript, General Electric []
  4. GE 1Q 2015 Earnings, General Electric [] []