Key Takeaways From GE’s Earnings

General Electric (NYSE: GE) reported its Q1’17 earnings on Friday, April 21, with revenues and EPS beat consensus estimates. GE’s cash flows declined by nearly $1.6 billion for the quarter, which resulted in nearly a 2% decline in its stock price on Friday. However, we believe that the decline in its cash flows will not have a significant impact on its EPS in the coming quarters. The decline in cash flows was primarily due to accounts receivable in aviation and power, which are likely to be cleared in the next quarter. Also, GE’s presence in emerging economies such as India and China is paying dividends, and we expect these to continue to grow in the coming months. The recent acquisitions, portfolio realignment, and joint ventures will also provide sustainable growth throughout the year. On the downside, volatility in oil prices still poses risks going forward as the GE-Baker Hughes deal is likely to be completed in the next few months.

Revenues And EPS Beat Consensus Estimates

GE’s overall revenues declined by nearly 1% in Q1’17 but revenue figures beat consensus estimates by more than 5%. GE also grew its EPS by 4 cents this quarter despite the continued headwinds from the oil and resource industry. There were a lot of positives in GE’s Q1’17 earnings, including order growth of 10%, backlog growth of about $3 billion in the quarter driven by strong performance of GE Power (17% growth in revenues), GE Aviation (8.7% growth in revenues) and GE Renewables (8% growth in revenues). GE’s cost reduction was also impressive in the quarter, which resulted in about a 130 basis point increase in its overall margins and an increase of 20% in its industrial profits.

Although GE’s oil revenues declined by 9.4% in Q1’17, it recorded the strongest quarter in terms of orders growth in its oil segment, as the orders grew nearly 9% this quarter. This is also an indication that a recovery is underway in the oil industry, which can further remedy GE’s sluggish growth. Historically, Q1 has not been the strongest quarter, which further suggests that GE is on a recovery path after missing its targets in 2016.

Declining Cash Flow A Concern For GE?

Despite beating the earnings and revenue expectations, GE’s stock price declined by 2% after its earning release. The decline in stock price can be primarily attributed to the company’s negative cash flow of about $1.6 billion, $1 billion below GE’s earlier guidelines. The decline in cash flows was primarily the result of a $1.3 billion increase in working capital and the timing of bills to its customers. However, we do not view this as a long-term concern, as GE said that the $200 million miss in aviation will likely clear in the second quarter with no issue. Thus, we still expect GE to meet its cash flow expectations of nearly $12 billion in 2017.

GE’s Global Presence, Acquisitions Likely To Boost Its Growth

GE’s presence in almost all parts of the globe has helped it reduce its cost significantly over the years. The high growth observed in China, South East Asia and parts of Africa in the past few quarters has also helped GE grow its revenues. In Q1’17, GE’s revenues from India was up 27%, the Middle East was up by 12% and Africa by 77%. GE’s presence in emerging economies is likely to partially offset the declines in the oil industry in the coming months. We expect GE’s businesses to grow at a higher rate than present in the coming quarters as a recovery in the global economy in 2017 is expected.

Additionally, GE’s acquisitions, portfolio management, and joint ventures will also improve its financial position in the coming months. GE-Baker Hughes Deal is likely to be completed by mid-2017 and LM Wind acquisition was completed this quarter, which will increase GE’s renewable energy performance starting next quarter. GE will divest its Industrial solution business in the second half of the year.

For our model and valuation, please refer to our complete analysis of General Electric

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