What To Expect From GE’s Q4

by Trefis Team
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General Electric (NASDAQ: GE) has had a rough ride of late, and has seen its stock decline consistently over the past year. The industrial conglomerate is scheduled to announce its fourth quarter results on Thursday, January 31, and we expect it to report another mixed quarter marked by strong headwinds. Instability in the Power division has been one of the major reasons behind GE’s subdued performance so far, and we expect the trend to continue when the company reports its Q4. The Power segment has plummeted, as a result of global commodity oversupply, geopolitical tensions, and increased popularity of renewable energy. However, we expect GE’s Aviation division to offer some respite, driven by increased shipments of the more efficient and cost-effective LEAP engines, steady growth in global air travel, improved global defense and military spending, and rise in air freight volumes. We expect the company to report revenues of nearly $33 billion, dampened by pressure on various divisions. Below we take a look at what to expect from GE in Q4.

Our price estimate for General Electric’s stock stands at $15, which is now significantly higher than the current market price. We have also created an interactive dashboard which outlines what to expect from GE in Q4. You can modify the key value drivers to see how they impact the company’s revenues and bottom line. Below we discuss some of the key factors that are likely to impact the brokerage’s earnings.

Factors That Should Impact GE’s Performance
 
GE’s Aviation segment has been one of the bright spots for GE, and has seen its revenue grow consistently in the first nine months of 2018. The division contributes nearly 25% of the company’s overall revenue, and saw its revenue grow by just over 11% to $20 billion in the year so far. This solid growth was mainly attributable to its higher equipment orders – driven by increased demand for LEAP engines and strong service orders. Further, the segment’s margins improved by nearly 160 basis points to 21.5%, largely due to improved pricing and cost efficiency. We expect its Aviation business to benefit from substantial growth in global air travel, as well as from increased air freight volumes. In addition, strong growth in the Military business and the expected delivery of about 1200 LEAP engines should further drive the segment. Moreover, GE’s wins at the Farnborough international airshow should complement the segment’s continued tailwinds and help boost segment revenue to nearly $28.4 billion (+6% y-o-y) in 2018.
 
The Renewable division contributes under 10% of the company’s overall revenue and has seen its revenue fall by about 6% to $6.2 billion in the first nine months of 2018, largely due to a lackluster performance in the first half of the year. This segment was the fastest-growing segment in Q3, as a result of improved demand for onshore wind turbine orders, partially offset by onshore wind repower volume. The pricing pressure and lower repower volume significantly compressed its margins, as they fell by about 320 basis points to 3.6%. The Renewable Energy segment holds decent growth potential for GE, as a result of solid order backlog – increasing domestic and international wind and hydro orders. In addition, we expect the LM Wind Power acquisition to further drive the segment’s revenue and provide for reasonable growth opportunities. Consequently, we expect the segment to grow by about 4% to $10.4 billion in 2018.
The Power segment has been the worst hit for GE in the year so far, and saw its revenue fall by 21% to $20.5 billion in first nine months of 2018. The subpar performance was largely due to broad-based weakness in Gas Power Systems – fewer than expected equipment orders, coupled with lower market penetration and growth of renewable energy. In a bid to revive the ailing segment, GE proposed a plan to reorganize its Power division into two separate businesses. We expect another tough quarter for the segment as a result of a challenging power market – mainly due to the high-end gas turbine market being fairly weak across the globe, as well as geopolitical tensions. We expect the 2018 revenue in this segment to decline by nearly 13% to $30.4 billion, driven by ongoing pricing pressure and lower than expected equipment orders.
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