GE’s Aviation Business Likely Drove Q3 Earnings Despite Continued Headwinds At The Oil And Gas Segment

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General Electric

General Electric (NYSE:GE) will announce its third quarter earnings for 2015 on October 16th. [1] The industrial conglomerate is coming off a modest overall performance in the second quarter with a slight revenue decline, in line with the street estimates. Looking at the third quarter, we expect GE’s aviation and transportation businesses to drive growth, while the energy business is likely to remain on the weaker side. GE’s energy business has suffered in the recent past due to a weakness in the overall sector and we expect a double-digit drop in segment top line in Q3.  The company is going through a transition phase to completely exit its finance business and focus on its industrial arm. The recently disclosed Nelson Peltz’s $2.5 billion stake in GE is likely to accelerate this transformation process. Nelson’s Trian Fund Management has asked GE to step up cost cutting and be more cautious on acquisitions. [2]

Separately, last month EU cleared GE’s Alstom deal and GE is likely to close that transaction by the end of this year. GE is already a world leader in the production and maintenance of gas turbines, but lacked heft in the steam turbine space. Now with Alstom on board, GE will fill this gap, as Alstom’s steam turbines are not only highly advanced but also have a large installed base in Europe. We will be looking for further updates on Alstom from GE’s management on its earnings conference call.

  • Trefis currently has a $27 price estimate for General Electric’s shares, translating into a $270 billion market cap. This is slightly below the current market price of $28.
  • We estimate the company’s 2015 gross revenues to be around $149 billion for earnings per share of $1.6, as compared to $1.3, according to Reuters.

See our complete analysis for General Electric

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Aviation Business Will Drive Growth While Oil & Gas Will Continue To Be A Drag

GE’s aviation segment displayed strong demand in the first half of 2015, as the overall aviation industry experienced growth. Reduced jet fuel costs, along with increasing revenue passenger miles in 2015, 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 37% rise in aviation orders in the previous quarter, as shipments of jet engines to airplane manufacturers grew. [3]

Oil prices remained low in the third quarter as well and this surely translated into lower operating costs and higher margins for airlines. This in turn, should give airlines the opportunity to invest in new equipment. Now we estimate that aviation segment constitutes 20% of GE’s total value, and a solid growth in this segment will play a key role in the overall results for the September quarter as well as for the full year. We currently estimate a 6% growth in Aviation revenues for GE to close to $25 billion in 2015. An estimated EBITDA margin of 26% will translate into EBITDA of $6.5 billion, representing 18% of the company-wide EBITDA.

While low oil prices will drive growth in the company’s aviation business, it will likely be a drag on the oil and gas arm. GE is one of the largest suppliers of oil and gas drilling machinery, and this business constitutes about 10% of the company’s value, according to our estimates. In the previous quarter, orders at GE’s oil and gas segment fell by a whopping 40% as energy companies slashed their investment in new equipment and machinery, given the falling crude oil prices. [4]

Given that the crude oil prices remained low through the September quarter (currently around $50), we anticipate GE’s oil and gas arm will have witnessed a slowdown in revenue growth as well. While the company has been taking cost cutting initiatives to offset this weakness, segment revenues still fell 15% in Q2 and it will likely report a double-digit drop in Q3 as well. Having said that, we believe that strength from aviation and transportation will help GE experience growth in Q3 2015, despite weakness in its oil and gas business. We will look for confirmation with the Q3 earnings release.

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Notes:
  1. GE’s Investor Relations []
  2. Top activist investor Nelson Peltz just disclosed a massive $2.5 billion stake in GE, Business Insider, Oct 5, 2015 []
  3. GE’s 2Q 2015 Earnings Press Release []
  4. GE Results Boosted by Industrial Growth, The Wall Street Journal, Jul 17, 2015 []