What Was The Reason Behind GE’s $9-Billion Loss In Q3?

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General Electric  (NYSE: GE) reported a substantial loss of $9.3 billion in Q3 2019, which compares with a net profit figure of $104 million in Q2 2019. The primary reason for such a drastic fall in profits was a pre-tax charge of $8.7 billion related to the deconsolidation of its Oil & Gas segment (Baker Hughes). GE sold a total of 144.1 million shares in Baker Hughes for $3.0 billion in cash (net of expenses). This reduced the congolmerate’s ownership interest in Baker Hughes from 50.2% to 36.8% and triggered an after-tax loss of $8.1 billion as a result of the deconsolidation.

Trefis analyzes the impact of the Oil & Gas segment deconsolidation on General Electric’s revenue and expenses during the quarter in detail as a part of the interactive dashboard – Why General Electric Reported A Substantial Loss In Q3 2019 Versus A Profit In Q2 2019?parts of which are highlighted below

 

What Were The Major Impacts Of Deconsolidation?

#1 Net Income Took A Hit Of More Than $9 Billion

  • General Electric’s net income dropped from $104 million in Q2 2019 to a net loss of $9.4 billion in Q3 2019, marking a decline of $9.5 billion during the quarter.
  • This decrease in profitability can be attributed to a $4 billion increase in total expenses as well as a $5.5 billion decrease in total revenues.

 #2 General Electric’s Top Line Shrunk Due To The Removal Of A Major Revenue Stream

  • General Electric’s revenue declined by nearly $5.5 billion during the quarter primarily as a result of the absence of the Oil & Gas segment which had revenues of almost $6 billion in Q2 2019. This impact was further exacerbated by a $0.8 billion decline in power segment revenues.
  • However, the decline in revenues was partially offset by a $0.8 billion and $0.2 billion increase in Renewable and Aviation segment revenues respectively.

 

#3 Total Expenses Swelled 15% Due To One-Time Charges Related To The Deconsolidation

  • Total expenses increased by $4 billion for Q3 primarily as a result of an $8.7 billion (pre-tax) charge related to the deconsolidation of the Oil & Gas segment, partially offset by a $4.5 billion decrease in cost of revenues.
  • The primary reason for this surge was an increase in Earnings from Discontinued Operations (net of taxes) from $231 million in Q2 2019 to (-$8.1) billion in Q3 2019.
  • Moreover, the company also revalued its remaining investment in Baker Hughes, which resulted in an unrealized loss of $86 million.
  • However, the company’s cost of sales shrank nearly 20% sequentially thanks to the deconsolidation – falling from $21.8 billion in Q2 2019 to around $17.3 billion in Q3 2019.
  • Additional details regarding other major expense items that moved during the quarter are available in our interactive dashboard.

Per Trefis estimates, GE’s adjusted EPS for 2019 is likely to be $0.46. Taken together with a P/E multiple of 25x, this works to a fair value of $12 for GE’s stock which is around the current market price.

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