General Electric Beats Consensus Earnings Estimates, Reaffirms Full Year Outlook

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General Electric (NYSE:GE) recently released stronger-than-expected results for Q1 2019 – sending shares of the troubled industrial conglomerate 4% higher. Notably, the total value of GE’s orders witnessed an organic jump of 9% year-on-year organically, which led to a 5% increase in Industrial revenues. However, adjusted Industrial operating margin contracted by 120 basis points to fall from 10% a year ago to 8.8% now.

Per Trefis estimates, General Electric’s shares have a fair value of $12, which is roughly 20% ahead of the current market price. We have summarized our full-year expectations for General Electric based on the company’s guidance and our own estimates, on our interactive dashboard– How Did General Electric  Fare In Q1 and What is the forecast for full-year 2019? In addition, here is more Trefis Industrial company data.

Key Takeaways From General Electric’s Q1 Results

Power Segment Shows Signs Of Improvement, But The Gains Could Have Been A One-Off Event

  • The company’s power business has been struggling of late, with revenues shrinking 22% in FY 2018. Power markets have faced challenges over recent quarters as a significant overcapacity in the industry has led to reduced utilization of the company’s power equipment. However, this segment showed signs of improvement in Q1. The value of the unit’s organic orders (orders excluding acquisitions and divestment of units) rose 14% year-over-year, with equipment orders in Gas Power nearly doubling. Also, the segment’s organic sales fell only 4% YoY, compared to a 19% YoY decline in orders in Q4 2018 and a 25% YoY plunge in revenue for that quarter.
  • GE’s management stated that they are in the initial stages of turning around the Power segment, and the better-than-expected performance for the quarter was principally driven by timing. Market factors such as increasing energy efficiency and renewable energy penetration will continue to weigh on the demand for GE’s power products in the near term.

Aviation Segment Continues To Grow

  • Aviation segment revenues grew by 12% YoY to $8 billion in Q1 2019 while total orders increased 7 % to $8.7 billion. These gains were led by higher commercial engine growth and continued momentum in the LEAP engine program. However, higher operating costs resulted in margins for the segment contracting by 160 basis points to 20.9% – resulting in a modest 4% increase in segment profit to $1.7 billion.
  • Going forward, we forecast the Aviation segment revenues to increase in the high single-digit range thanks to healthy growth in air travel globally, improved global defense and military spending, as well as increased shipments of the more efficient and cost-effective LEAP engines. The segment’s profitability is also expected to improve slightly due to increased price, increased volume, and higher spare engine shipments.

Renewable Energy Segment Had A Difficult First Quarter

  • Renewable segment reported revenues of $1.6 billion in Q1, down 3% YoY, led by a 7% decline in the Equipment sub-segment partially offset by a 11% increase in the smaller Onshore Wind sub-segment. Segment margins were -10% (as opposed to 4.7% in Q1 2018), due to liquidated damages and contract terminations in 2018.
  • Although the renewable segment had a difficult first quarter, this segment holds decent growth potential for GE as it has a strong order backlog and stands to gain from an increase in domestic and international wind and hydro orders. Moreover, the management stated that it faces a steep production ramp and expects to more than double deliveries of wind turbines in the coming quarters.

Oil And Gas Business Achieves Modest Growth

  • General Electric has a majority share in Baker Hughes and reports results for this business under the Oil and Gas segment. The top line of the segment increased 4% YoY, while orders surged 9%. Year-over-year revenue growth was driven by a strong showing by the Oilfield Services and Oilfield Equipment sub-segment, which more than made up for a decline in Turbomachinery revenues. Going forward, this segment is expected to sustain its growth momentum as global oil and gas markets stabilize.

Full-Year Outlook

  • General Electric maintained its full-year guidance and expects organic revenues to grow in the low to mid single-digit range while adjusted EPS is projected to be in the range of $0.50 to $0.60.
  • Based on our forecast, General Electric’s Non-GAAP EPS for full-year 2019 is likely to be around $1.00. Using this figure with our estimated forward P/E ratio of 12x, this works out to a price estimate of $12 for the company’s shares, which is about 20% ahead of the current market price.

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