General Electric (GE) reports Q2 earnings Friday morning before the markets open. Analysts expect GE earnings to come in at 39 cents per share, three cents higher year-over-year. While earnings appear to be improving, there are a lot of changes taking place at General Electric. Uncertainty surrounding those changes has GE stock struggling to find any traction so far in 2014.
With GE stock down 3.6% year-to-date through July 14, Jeff Immelt must to bring his “A” game to Friday’s conference call if he wants GE to get moving in the right direction. Since Immelt took the top job September 7, 2001, GE stock has gained a meager 3.8%. By comparison, the SPDR S&P 500 (SPY) achieved an annualized total return of 6.6%.
This might not seem like a lot but when you factor in inflation and the opportunities lost, it’s horrendous. At some point, investors are going to give up on GE stock — if they haven’t already. The behemoth conglomerate is making a lot of moves but so far it has amounted to very little.
That needs to change. Here are a few things to watch for come Friday’s release.
Immelt is keen on transforming General Electric into the industrial juggernaut it once was. After it completes its $17 billion acquisition of Alstom’s (ALSMY) power business, General Electric will generate 75% of its operating earnings from infrastructure assets and just 25% from GE Capital, its finance subsidiary.
While the Alstom deal won’t be completed until 2015, it’s important that investors receive assurances that the annual cost savings from the deal — estimated around $1 billion — are very much intact. Any fumbling of this message will be immediately harmful to GE stock.
Synchrony Financial IPO
There has to be some indication there’s an end game to the Synchrony Financial IPO. Immelt indicated in May that the sale of 20% of its North American credit card operations (the remaining 80% to be distributed to shareholders in 2015 or exchanged for GE stock) in an IPO is “on track.”
With the division’s value estimated at $20 billion, it’s important that the company maximize the money it makes from exiting this business. That said, if the exit goes beyond the middle of next year, you can be sure investors aren’t going to be sympathetic to either GE stock or the new Synchrony shares.
What’s happening with its industrial businesses? Q1 2014 delivered an 8% increase in revenue combined with a 12% increase in profits. Investors want to see this momentum continue. If there’s any sign the industrial units have slower growth ahead, GE stock is definitely headed for a fall. That isn’t likely to happen, but it’s wise to keep an eye on those numbers.
Especially important is its oil & gas division, which saw revenues and earnings increase by 27% and 37% respectively in the first quarter. The industrial segment in its entirety wouldn’t have done nearly as well if it weren’t for its oil & gas business. And let’s not forget aviation, its bread and butter. In Q1, aviation accounted for 24% of its industrial revenue and 34% of the segment profit.
GE stock received an early indication that the news will be good. The company announced that its joint venture with Safran SA (SAFRY) won a contract from easyJet (ESYJY) to provide jet engines for 100 new Airbus Group (EADSY) A320s along with 35 existing planes. I’d expect Immelt to be very enthusiastic about its aviation business when it holds its conference call Friday.
GE Earnings Preview — Bottom Line
Jeff Immelt is betting the company’s future on its industrial segment. Its purchase of Alstom’s power businesses is the biggest acquisition in its history. If Friday’s report doesn’t throw up any huge red flags (there aren’t any on the horizon) it’s safe to say that GE stock has a much better chance of heading up rather than down through the second half of 2014.
Should you buy GE stock prior to Friday? There’s no urgency. I’d wait until after the call to make sure all’s well at General Electric.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.