General Electric’s Q3 Earnings Bolstered By Aviation Growth

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General Electric (NYSE:GE) recently announced its third quarter earnings, which largely came on expect lines. While GE’s energy business remained subdued due to a weakness in the overall sector, its aviation segment did well. Looking at GE Capital, it’s portfolio sales are pacing ahead of actual plan, which will likely facilitate an incremental dividend from GE Capital of $2.5 billion in Q4. [1] An overall decline in organic orders was again on expected lines amid a tough comparison of aviation and transportation segment to the prior year period. Looking ahead, we believe aviation will continue to do well in the medium term as the overall industry is witnessing growth. Reduced jet fuel costs, along with increasing revenue passenger miles, justify the rise in demand for new airplanes globally. Airplane manufacturers such as Boeing and Airbus hiked up their production rates and this will drive growth for GE in the medium term, in our view.

See our complete analysis for General Electric

Aviation Business Drove Q3 Earnings Growth While Oil & Gas Remains A Drag

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The aviation sector showed robust growth during the quarter as oil prices continued to remain low through the quarter while strong service volume further bolstered the segment growth. The segment revenues were up 5% while profits grew 7%. Now the overall industry is performing well with travel demand up 6.6% in first eight months of 2015. [1] This is aiding growth for GE and it is likely to post better Q4.

The healthcare segment witnessed a 5% decrease in revenue but was up 2% on a constant currency basis. Organically, the segment saw a 3% rise in orders during the quarter. While developing economies, such as China has been aiding the overall segment growth, GE still relies on developed economies – the U.S., Japan and Europe – for 75% of the segment revenues. As such, there won’t be any meaningful impact on healthcare business from slower growth in Chinese economy. In fact, China’s private healthcare market has grown 15% to 20% a quarter. [1]

The oil and gas segment was a drag on overall industrial segment revenues and profit. The segment witnessed deteriorating revenues and profits with crude oil prices showing no substantial recovery through the quarter. Oil and gas revenue was down 16% while profits came in 11% lower. [2] 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 Q3, orders at GE’s oil and gas segment fell 32% organically, as energy companies slashed their investment in new equipment and machinery, given the falling crude oil prices. This is likely to remain the case in the near term until oil prices recover.

Overall, strength from aviation, transportation and healthcare segments gives us confidence that GE will continue to grow its results in the medium term, despite weakness in its oil and gas business. We currently have a $27 price estimate for General Electric’s shares, with EPS of $1.6, which we will soon update to incorporate the recent quarterly earnings.

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Notes:
  1. General Electric’s (GE) CEO Jeff Immelt on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, Oct 16, 2015 [] [] []
  2. General Electric’s SEC Filings []