General Electric Pre Earnings: GE Digital To Drive Its Industrial Businesses

General Electric (NYSE: GE) will report its Q4’16 earnings on January 20th. We expect a mid to high single-digit growth in its earnings driven by strong performance of Power, Renewable Energy, and Digital segments. After closing the Alstom deal in 2015, GE started to capitalize on the joint venture and is likely to continue that momentum going forward. Additionally, more than 19,000 developers are already working on GE’s Predix platform and about 270 companies have joined GE digital alliance. This, along with partnerships in the power sector and acquisitions in artificial intelligence are likely to aid GE’s growth in the fourth quarter. GE Aviation and GE Healthcare are also likely to continue their growth in this quarter, and this will offset any decline that’s expected in the oil & gas segment. OPEC deal has caused oil prices to go up and this might bring some relief to GE’s declining oil & gas revenues.

GE Power, Renewables To Remain The Fastest Growing Segments 

GE Power revenues have grown enormously in 2016 driven by high order backlogs of the GE-Alstom joint venture which started its operations in late 2015. GE Power grew nearly 37% in Q3’16 taking the year to date growth to 27% in the first nine months of 2016. We expect this momentum to continue in Q4’16 as well driven by the increase in company’s digital revenues from this segment and backlog of GE-Alstom joint venture. GE digital revenues are set to cross $7 billion in 2016 and most of GE Digital revenues comes from GE Power and GE Renewable energy. GE also signed its largest Power Plant software deal in November 2016 with U.S. energy utility Exelon which will use GE’s full software set to analyze and manage power plants in 48 states.

GE Renewable energy has followed the similar path and grew nearly 51% in the first nine months of 2016. We expect this growth momentum to continue in Q4’16 as well due to the increasing demand of clean energy sources and enhanced capability of this segment due to Alstom joint venture.

GE Aviation and GE Healthcare To Provide Stable Growth To GE 

Investors have also been optimistic about the U.S. economy recently due to the reforms and general economic growth. GE Aviation and GE Healthcare have provided GE with stable growth in 2016 and have offset the decline in revenues due to the downturn in oil and gas industries. Both of these segment account for nearly 40% of GE’s industrial revenues and have grown nearly 5% in the first 9 months of 2016. Due to the increased air traffic and increased demand for healthcare products from developing countries, these segments are expected grow in near term. Additionally, the introduction of GE digital to GE Healthcare and GE Aviation will open more room for growth in the coming quarters.

OPEC Deal May Bring Some Relief For GE Oil & Gas

GE oil and gas has been declining for the past couple of years now but some of the events in Q4’16 related to oil &gas industry have bought optimism among GE investors. GE’s deal to form a joint venture with Baker Hughes was a huge step as GE will increase its reach and save around $1.6 billion by 2020. Although this deal will not have any impact on GE’s Q4’16 earnings, it certainly becomes very important after OPEC deal to cap their oil production. OPEC countries finally reached the deal to cut their production and this caused crude oil prices to jump beyond $50 for the first time since August 2015.

We expect a marginal recovery in GE’s oil & gas revenues for Q4’16 due to the improved price. However, the impact of this improvement will increase in magnitude after this quarter and GE-Baker Hughes deal may prove to be more profitable to GE than anticipated earlier.

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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