GE Q3’16 Earnings: Moderate growth expected for 2016

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General Electric

General Electric (NYSE: GE) reported its Q3’16 earnings on Friday, October 21st and results came in line with the consensus estimates. GE’s Oil & Gas, Transportation and Energy Connections segments continued to put pressure on revenue growth due to the lingering weakness in global mining activity and relatively subdued crude oil prices. On the other hand, Renewable Energy, Healthcare and Aviation are bright spots for GE’s future growth. Additionally, GE’s acquisitions in the past few months are likely to open new market opportunities in emerging countries.

 

Power, Renewables and Healthcare to continue their growth trajectory

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GE’s Power segment revenues grew by 37% in Q3’16, driven by aero and gas turbines along with increased Alstom orders which was partially offset by distributed power resets. Both orders and backlog for Power were up 34% and 56%, respectively, due to the strong performance of the GE-Alstom joint venture in Q3’16. GE’s overall Power revenues are estimated to increase by more than 25% for the full year 2016.

The Renewable segment also witnessed strong growth in Q3’16 with a 66% increase in revenues due to new contract wins from Alstom. The GE-Alstom joint venture is likely to gain more ground in the coming quarter as it recently won a large offshore wind project in Germany, worth over $1 billion. We believe that the renewable segment will be the key for GE’s growth going forward because of its strong potential and encouraging growth in recent quarters. In fact, it is the highest growing segment in the energy sector and GE’s strong position is likely to generate more backlog in future.

GE Healthcare was also crucial in the company’s third quarter revenue growth. We continue to expect a significant contribution from this business due to GE’s market leading products and its marketing muscle in China and India. It is also evident from the fact that about 20% of GE’s Healthcare revenues come from Asia Pacific and its public tender activity went up by 20% in China in Q3’16, which is a very significant market for GE in the region.

 

Oil & Gas, Transportation and Energy businesses decline to slow down

GE’s Oil & Gas revenue declined 25% in the quarter and revenues in the Transportation and Energy Connections businesses both declined by 22% due to the continued weakness in mining activity, subdued crude oil prices and decline in non-LED lighting market decline.

However, Organization of Petroleum Exporting Countries (OPEC) finally concluded that they will cap their combined oil production between 32.5 and 33 million barrels per day, which triggered about 22% price surge in oil prices in Q3’16. This could help slowdown the revenue decline in the coming quarter, and may help revive GE’s business going forward. It is also expected that China’s economy will regain its growth post 2017 due to expected surge in crude oil prices due to OPEC countries resolution and thus resulting in improved commodity prices.

 

Growth in Aviation, Predix and GE’s acquisitions to maintain sustainable revenue growth

GE’s Aviation segment revenue increased by 5% in Q3’16 due to newly acquired businesses and some new customers. We believe that the aviation segment is likely to be the key for GE’s growth going forward as global passenger air travel continues to see strong growth in both domestic and international markets. Additionally, GE aviation services saw its service orders go up by 10% and growth market orders by 21% in the third quarter. GE’s advanced analytical tools along with its new Predix platform seem to be doing the trick. Software orders are also growing with customer wins including Gairdow, NEC, Aramco, Haier, and CN in Q3’16. GE’s Predix now has about 243 partners and is on track for 20,000 developers by end of 2016.

In Q3’16, GE announced the acquisitions of SLM, Arcam, Meridium and LM Wind Power in the field of additive manufacturing equipment, asset performance management and wind power respectively. These are likely to pay off in 2018 and will ensure sustainable growth, improved margins and growth in emerging markets.

 

GE Capital Exit Plan expected to be completed by the end of 2016

GE continued GE Capital exit plan with asset sales of $16 billion in Q3’16, bringing the total closed transactions through the end of the quarter to $173 billion. GE Capital earned $466 million in Q3’16, up 33% from last year, primarily driven by lower impairments in Energy Finance. Additionally, in 2016, GE returned $24.6 billion to investors through dividends and buyback, which will be at least $30 billion for the full year 2016.

 

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of General Electric

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