Here Are The Key Takeaways From GE’s Q4 Earnings

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General Electric

General Electric (NYSE:GE) recently reported its Q4 earnings, which grew to $0.51 per share as compared to $0.32 per share a year earlier. On an adjusted basis, the company earned $0.56 per share, beating most of the street estimates. If we compare 2015 to 2014, GE’s Power, Energy Management, Aviation, Transportation and Appliances & Lighting business exhibited an increase in revenues, while its Oil & Gas, Renewable Energy and Healthcare exhibited a slight decline. Oil & Gas segment was the worst hit because of a continual decline in oil prices, which have led to a decreased demand for drilling equipment. We expect a persistent weakness in the oil and gas business will keep a lid on GE’s revenue growth. Having said that, we also believe that GE’s other segments will continue to maintain a stable growth rate, which will counter the oil and gas decline. The company itself expects a 2% to 4% organic growth for 2016 even with a very difficult Oil & Gas market.

See our complete analysis for General Electric

Power Division Will See Steady Growth In Future

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GE was successful in increasing its number of orders for Gas Power Systems by 60% mainly due to orders for 55 gas turbines as compared to 41 last year. However, aero turbine orders were down 14% on 43 units versus 50 last year. GE Power revenues grew 3% to $7 billion for the quarter. Going forward we expect the aforementioned segment to bring in a steady stream of revenues because of GE’s presence in emerging markets, which are constantly  updating their power plant infrastructure to keep pace with their GDP growth. However, there is the important concern that a shift from fossil fuel powered generation to renewable based power production can hamper growth. That said, a sudden and large shift seems unlikely given the slow adoption and implementation of renewable energy.

International Demand To Drive Renewables Growth

Total renewable energy orders were $2.5 billion in the quarter, up 1%. GE managed to secure orders for 827 wind turbines versus 1,251 a year ago in the quarter. This decline was primarily because of a decrease in orders from U.S. companies. However, international orders were up 19% with a strong pipeline of orders from Europe, the Middle East and South Asia. Backlog in the Renewables core business ended at $7.1 billion, up 27% year-over-year. GE was also a strong beneficiary of orders because of its Alstom acquisition.

Going forward in 2016, GE expects to ship about 3,050 onshore turbines including 250 of Alstom wind units.We also believe that renewable energy demand will be pronouncedly weaker in the U.S. because of increased shale oil production and return of the US to energy self sufficiency. However, we expect demand to remain strong in Europe, the Middle East and Southern Asia. This can be attributed to the growing interest of the Middle East to venture into solar energy given the favorable climate in the region. Also, the Middle East wants to reduce its dependency on oil revenues and prolong its oil reserves. This applies more to the current situation because of a sharp decline in oil prices and hence in oil revenues. Accordingly, in a bid to diversify its sources of wealth, the Middle East is vigorously exploring the renewable energy options. Also, countries in South East Asia like India and China are heavily investing into solar and wind energy given the finite amounts of oil resources and most of their demand for oil needs to be met through imports, which has a drag on their fiscal balance. Against this backdrop, we expect renewable energy revenues from GE’s international segment to remain strong in the coming years, though there is a chance that this increase may be slightly tempered through a declining demand from the U.S. because of the preponderance of shale oil sources of oil extraction.

Aviation Continues To Spur Growth For GE Amid Declining Oil Prices

Orders for Aviation segment declined 16% during the quarter to $6.8 billion. GE managed to secure a total of $1.9 billion of engine orders. Service orders were higher by 9% with strong commercial spares orders. Services backlog ended the year at over $116 billion, up 15% versus last year. In short, the Aviation division delivered another strong year with 3% revenue growth and margin expansion of 160 basis points. Going forward we project this strength to continue because of increased passenger and freight demand. We expect the demand for air travel to pick up given the increasing purchase power of Asian customers and steady GDP growth rates in Asian economies. This coupled with the advantage of low oil prices for extended duration will further spur demand for more efficient and powerful jet engines from airlines. Airlines who in particular are looking to expand or improve their relatively old fleet will consider this oil price decline as a particularly opportunistic moment to take advantage of by investing heavily in their fleet.

Healthcare Holds Promising Future For GE

While the Healthcare division did well in Q4, its performance was not evenly distributed across each geographical region. Total orders for Healthcare amounted to $5.2 billion, a resultant 1% increase organically. Geographically speaking, orders in the U.S. were down 1%; Europe was up 4% without taking into effect currency headwinds. Healthcare Systems struggled partly due to a fall in demand for molecular imaging and X-ray scanners. However, the same was partially offset by a stronger demand for magnetic resonance imaging and Ultrasound. Going forward we expect increasing expenditures on healthcare due to the prevalence of various diseases given a sudden shift to a highly strenuous urban lifestyle. Also, a growing middle class in Asia and their preference for non-invasive imaging and robotic incision based surgery will drive medical equipment demand. Furthermore, intense competition amongst healthcare insurers will force patients to cut down their in-hospital stay and drive demand for more precision based surgical equipment and greater innovation in medical technology.

Overall, GE’s earnings were in line with our estimates and we expect 2016 revenues to be $163.5 billion for an EPS of $1.93. Oil & Gas will continue to be a drag on earnings in the near term due to the sliding oil prices while GE’s other businesses, such as Aviation will spur growth and help the company offset some of the declines. We have highlighted various deals signed by GE during the last quarter. With increased backlog and impact of Alstom’s acquisition, GE will likely see a 9.5% growth in its top line during 2016.

Major Deals Signed In Q4

General Electric also signed multiple deals in the last quarter:

– A $2.5 billion deal for 1000 locomotives and services with the Indian Railways

– New contract for12 HA turbines taking the backlog to 45

– $400 million deal for hydroelectric turbines in relation to the Three Gorges project in China

– A contract for combined cycle power plant technology with Saudi Electric Company

– Won orders worth $17 billion in engines and services at the Dubai Air Show

– GE-Alstom won a deal of 120 MW wind power plant in France

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