Most stock info sites will tell you that General Electric Company (NYSE:GE) is a “technology and financial services company that makes and develops products for the generation, transmission, distribution, control and utilization of electricity.”
In short, what that means is that GE is a gigantic conglomerate that does everything from making airplane engines to helping businesses analyze data. It’s a lot to wrap your head around.
For investors, it can make trying to digest the quarterly earnings report a real chore, and make it difficult to determine the direction of the company and GE stock.
So, when General Electric announces earnings this Friday, here’s what you need to know to understand GE’s business and its immediate future.
CEO Weighs In on General Electric’s 2015
As I stated earlier, GE touches many different industries. Here is a breakdown of its eight divisions with their 2013 revenue contributions in parentheses:
- Power & Water (17%)
- Oil & Gas (11%)
- Energy Management (5%)
- Aviation (15%)
- Healthcare (12%)
- Transportation (4%)
- Appliances and Lighting (6%)
- GE Capital (30%)
Now, the revenue picture does provide some insight into the more significant segments of their business. But there is a developing story behind the scenes that has shaped GE for the past few years and presents the problems they currently face.
This was all highlighted a little more than a month ago when investors listened to General Electric CEO Jeff Immelt’s conference call about the company’s outlook for 2015.
Immelt began with what he believed would be the positives going forward — the downsizing of it’s consumer-faced segments.
Most people think of General Electric as an industrial or consumer product company. What they don’t realize is that the biggest chunk of revenue comes from GE Capital. (Investors, however, are all too aware of this fact.)
Synchrony Financial (NYSE:SYF), the spinoff of GE’s consumer credit business, is an attempt to divest a significant amount of General Electric’s consumer finance business to get back to the company’s core business of manufacturing industrial equipment.
GE also has decided to sell its legendary appliance division. Last September, GE signed a deal to sell its appliance line to Sweden’s Electrolux for $3.3 billion in cash. The growth prospects for the business, along with its revenue contribution, did not seem worth the trouble.
These moves made in 2014 were intended to reposition GE for a strong 2015. But even before the year ended, the new “market kryptonite” surfaced and dragged down GE stock.
Oil Prices Will Hit GE, Too
General Electric has many working parts, but the market is presently concentrating on its new focus in the oil and gas industry.
Oil & Gas had been the fastest-growing GE industrial segment. Over the past eight years, General Electric has been all-in on the segment, investing $14 billion in oil-related acquisitions since 2007 to help GE become less dependent on the finance division. The segment has become a $17 billion division that offers equipment, drilling and production systems, and services to global oil and gas extraction companies.
However, in the call, Immelt had to admit to the impact of low oil prices on GE.
As stated above, GE earned about 11% of its revenues from its oil and gas division, but many believe that number was somewhere in the 15% to 20% range by the end of 2014.
The problem: Demand around the world is determined by the cost of capital. Companies look at the price of oil to determine if the project is feasible. When the price of oil goes from more than $100 a barrel to $50, energy companies need to rethink their projects. And if there’s a cutback in projects, there’s a drop in demand for GE equipment.
Expect Earnings to Be Less Than Stellar
When oil prices really started to sink in the last part of 2014, energy stocks were among the first and heaviest hit — after all, it was an easy connection to make.
However, as various companies who have less obvious ties to oil prices begin to report earnings, many investors could be in for unpleasant surprises.
GE forecasts 2% to 5% organic growth for 2015, and Mr. Immelt stated an expectation of $1.70 to $1.80 per share for the full year. But because General Electric has been repositioning toward oil and gas, GE stock is clouded in ambiguity.
We’ll start to get a clearer picture of just how heavily oil prices might weigh on the company when General Electric reports Friday.
But don’t expect that picture to be promising.
As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.
