GE Q4’16 Earnings: 2016 Ended On A Low But GE’s 2017 Outlook Remains Strong

by Trefis Team
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General Electric (NYSE: GE) released its Q4’16 earning on Friday, January 21st and its revenues for the quarter declined nearly 2% in the quarter. GE’s industrial margins also declined for the quarter and full-year 2016, due to losses from the Oil & Gas and Transportation segments. However, GE Aviation, GE Power, GE Renewables and GE Healthcare grew this year and resulted in overall 5% increase in GE’s total revenue for 2016. We expect 2017 to be better than 2016 for GE, as oil prices have increased with the OPEC agreement to cut production. This should help GE’s oil-related industrial sales.  In addition, other commodity prices have improved in the past couple of months, though more modestly.  Additionally, GE’s acquisitions and joint ventures of the past year or two will bolster GE’s growth in 2017. These include, most notably, the  GE-Alstom deal, the GE-Baker Hughes deal, and the LM Windpower acquisition.  In addition, GE Aviation and GE Healthcare are also expected to continue their growth in 2017 and will help GE in increasing its industrial margins due to increased profitability of these two segments.

 

Headwinds in Oil and Resource Industry To Continue In The First Half Of 2017

GE’s oil & gas and Transportation segment continued its steep decline in Q4’16, taking the decline for the quarter and full year  to 22% and 21%, respectively. The challenging environment in the oil and resource industry continued this quarter but the recent OPEC deal to cap their oil production has led to increase of crude oil prices by nearly 20% just after a month of the announcement. An increase of 33% in U.S. onshore rig count versus Q3’16 was also observed this quarter, signaling improvement in the coming quarters. Transportation segment is also expected to be down in the first half of 2017 as North American transportation industry continues to suffer due to declining freight rates and growing fleets of transportation companies. Although we expect sequential improvement in GE oil & gas starting this quarter, year-to-year growth is expected only in the second half of 2017, after the close of the GE Baker Hughes deal.

 

Power, Renewables, and Healthcare To Offset Oil Industry Headwind

GE Power and Renewables had a solid year in 2016, with the segments increasing by 25% and 44%, respectively, for the full year 2016. GE Power was driven by increases in GE-Alstom joint venture orders, as well as increases in gas turbine and service orders. Driving the latter increase was growth in GE’s AGP (Advanced Gas Path) solution installations and strengthened demand in India, Middle East and Africa. GE Renewables increased significantly this year, particularly in the U.S., driven by the safe harbor qualification 2016 for 100% PTC benefit going forward. Alstom orders also helped this segment’s growth, where Alstom revenues grew by 161% in Q4’16. We expect this momentum to continue in 2017 due to additional revenues from the pending LM Wind acquisition. Still, we expect only high single digit growth in these segments in 2017, as we have hit the anniversary of the closure of the Alstom transaction.

 

GE’s Margins Declined But Were Partially Offset By Increased Profitability In Aviation, Healthcare

GE’s overall earnings from its continuing operation in 2016 increased by 10% year to year.  However, its industrial margins declined by nearly 30 basis points due to losses in the  Oil & Gas and Transportation segments. This was partially offset by improved margins in GE Aviation and GE Healthcare. GE Aviation was particularly strong this year with an 11% increase in segment profit in 2016 driven by favorable pricing, unit volumes, and productivity. Strength in global passenger air travel continued in Q4’16 and we expect this momentum to continue due to increased demand from both domestic and international routes due to expected rebound in the U.S. GDP in 2017 and increasing global trade. GE Aviation is likely to continue its double-digit growth in 2017 as well, due to its high backlog of LEAP engines and commercial engines.

GE Healthcare is another segment where GE’s profitability has increased notably in 2016. GE’s margins from this segment grew by nearly 100 basis points driven by cost productivity and higher volumes. We expect this segment to continue its growth in 2017 as well due to 25 new product launches by GE Healthcare in 2017, as well as continuing strength in Asia Pacific, Africa, China and Latin American regions.

We are currently reviewing our valuation model for GE in the light of the recent earnings and will have an update soon.

 

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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