General Electric Q1 Earnings Preview: Oil Prices To Pressure Bottom Line

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General Electric (NYSE: GE) will report its Q1’17 earnings on April 21, 2017. We expect high single-digit growth in GE’s revenues due to the mixed impact of strong growth in the power and renewable segments, partially offset by the decline in its energy business. GE’s profits have declined heavily in the last few years due to the continued downturn in the energy and resource industries. GE is under pressure to cut costs and invest in high-margin businesses, and recently sold some low-margin and stagnant businesses and invested heavily in its digital and renewable businesses.

Overall Growth Likely, Oil Industry Downturn To Put Pressure On Profits

GE’s Power and Renewable Energy division revenues grew nearly 25% and 44%, respectively, in 2016 primarily due to the Alstom acquisition and expansion in developing economies such as India, Middle East, and Africa. Q1 2017 will not reflect any inorganic growth from Alstom, which will give us a better picture around the organic growth of Alstom and GE’s renewable business as a whole. We expect the growth to be in high single digits due to the high backlogs in this division. Additionally, GE completed the acquisition of LM wind power in Q1’17 and GE renewables will start reaping the benefits from this.

GE Aviation is another segment which has grown consistently in mid to high single digits in the last 5 years. Strength in global passenger air travel continued in Q4’16, and Q1 2017 will likely see something similar considering the expected rebound in U.S. GDP in 2017 and increasing global trade. However, crude oil prices have not gone above $55 per barrel, and the margins of GE’s Oil & Gas and transportation segments are likely to remain low, adding pressure on GE’s overall profits this quarter.

GE Management’s Compensation Linked To Company’s Performance

In the last five years, GE’s shares have underperformed S&P 500 by over 15 percentage points and it hasn’t gone over very well with GE’s investors. The company announced several cost-cutting measures including changing its cost structure, revamping management compensation and linking compensation with performance. Recently, GE CEO Jeff Immelt’s salary was reduced by nearly 35% due to the underperformance of the company’s stock.

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Source: Google Finance

GE Break-Up Picture Emerges, But Is It Likely?

GE is exploring a sale of its $3 billion Industrial Solutions business, which will help the company shift its portfolio and shed low-margin businesses while strengthening the high-margin industrial segments such as GE Aviation and GE Power. Recently, GE also sold its Water Treatment unit for $3.4 billion which was seen as a facilitator of the GE-Baker Hughes deal announced in November 2016. To add to this, there are reports claiming that GE is likely to sell its lightbulb business as well. Some analysts suggest that GE might break up its segments in order to generate higher earnings per share. We, however, believe that a significant break-up of a company as big as GE is unlikely in the near term. The businesses sold off recently can be seen as trimming and small transactions, as these segments contributed less than 5% to GE’s overall revenues in 2016. Also, as crude oil prices will go up eventually, we believe that GE is in a position to stem the downturn in its energy and transportation businesses going forward.

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