General Electric Q3 Earnings: Poor Performances In Power and Oil

by Trefis Team
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General Electric (NYSE: GE) reported its Q3 earnings on Friday, October 20 and its earnings came in below consensus estimates. GE’s overall profits declined by nearly 10% in the quarter, primarily driven by losses in the Power and Oil businesses. GE’s Power business profits declined by nearly 51% due to weakness in the power services industry. The increased dependence on the oil industry due to the Baker Hughes deal will also put pressure on GE’s margins in the coming quarters. One bright spot for GE was its Aviation segment, which benefited from the sale of Avio and military equipment orders. Interestingly, GE Aviation’s Q3 results did not include Paris Airshow announcements, which will continue to drive growth in the coming quarters for GE Aviation. Lastly, the Healthcare and Renewables segments have grown solidly in the past year, and we expect this trend to continue in the coming quarters.

GE Will Face Headwinds from Its Oil & Gas and Power Businesses

GE Power accounts for nearly 26% of GE’s overall revenues and about 17% of GE’s overall profits. GE Power’s profits declined nearly 15% in Q2, primarily due to weak demand in the power services market. The Power segment’s profits almost halved this quarter due to poor execution, project delays and weakness in the power services market, according to GE’s management. We believe that the weakness in the power services market is likely to continue for at least another few quarters due to relatively low outages observed in the last few months. GE also mentioned in its earnings presentation that customer financing and the geographical complexity of deals were also factors being the poor performance.

The Oil & Gas business contributes nearly 16% to GE’s overall revenues. However, the segment’s profits have declined significantly in the last few years due to the continued weakness in the oil & gas industry. GE bought Baker Hughes last year and owns 62.5% of the newly formed company entity. The deal, however, increased GE’s dependence on the oil market, and as a result GE’s industrial margins declined by 220 bps in the quarter. We believe that the volatility in the oil industry will likely continue and put pressure on GE’s overall margins.

Aviation, Healthcare, Renewables Will Partially Offset The Declines

GE Aviation is the largest contributor to GE’s overall profits accounting for nearly 46% of GE’s overall profits. GE Aviation has been growing consistently for the last 5 years and this quarter’s performance was no different. The demand for both domestic and international flights has been increasing in the past few quarters due to improved macroeconomic conditions globally. GE is one of the largest manufacturers of commercial airplane engines, and should continue to benefit from the current industry growth.

GE Healthcare and Renewables together contribute nearly 25% of GE’s overall revenues and 30% of its profits. The two segments have grown strongly in the last year due to GE’s international expansion in the Healthcare business and new acquisitions in the Renewables segment. We expect these segments to continue to grow solidly over the next few quarters.

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

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