What To Expect From GE’s Q4
General Electric (NYSE: GE) is set to announce its fourth quarter results on Wednesday, January 24, and we expect the conglomerate to report another mixed quarter marked by strong headwinds. Soft performance across the power, oil & gas, and transportation divisions has impacted GE’s earnings so far and we expect the trend to continue in the near term. Subdued performance in the power division – driven by global commodity oversupply, outage, and increased use of renewable energy – has been the primary growth inhibitor for the company. However, the company’s aviation division has offered some respite, driven by global defense and military spending. We expect the company to report revenues of nearly $34 billion, dampened by pressure on various divisions. We have created an interactive dashboard that illustrates our expectations for GE’s earnings.
Power, Transportation, Oil & Gas Likely To Underpin Overall Performance
We expect GE to report a subdued performance in Q4 driven by pressure on the Power, Transportation, and Oil & Gas segments.
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The Power segment was down 4% year-on-year in Q3’17 driven by lower shipments of aeroderivative products, and poor performance of the Power Conversion business. We expect this trend to continue into Q4 driven by the power outage and increased use of renewable energy. In its November 2017 investor update, GE hinted that it continues to face pressure on its Power segment and expects the operating margins to fall to 20% in 2017 and 25% in 2018.
The Transportation segment has remained fairly stagnant throughout the year and fell 14% year-on-year in Q3’17 driven largely by the slowdown in the North American market. We expect this to continue into Q4 as the segment’s fate is tied to the growth in the North American rail market and international market.
The Oil & Gas segment reported revenues of $5.4 billion, an increase of 81% year-on-year in Q3’17, driven by the effects of the Baker Hughes transaction. The segment, after adjusting for Baker Hughes transaction, reported $2.8 billion in revenue for the quarter, down 5% year-on-year in Q3 driven by weakness in the oil and gas market. We expect this short-term impact to spill over into Q4.
Aviation Upside
The Aviation segment is the most likely source of any tailwinds for GE. The segment grew 8% year-on-year in Q3’17, driven by increased demand for commercial and military spare parts. We expect the Aviation segment to continue its growth trajectory driven by global defense and military spending and continued efficiency in the LEAP (Leading Edge Aviation Propulsion) engine. Consequently, the production costs are expected to have fallen 20% by the end of 2017 and 23% in 2018 compared to 2017. This should help aid a potential margin recovery for GE.
At present, our price estimate for General Electric’s stock stands at $23, which is 15% above the market price.
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