There’s Little Upside Left in General Electric (GE)

Advertisement

Giant industrial conglomerate General Electric Company (NYSE:GE) just got done delivering a mixed bag for its fiscal first quarter. While GE earnings managed to narrowly beat analysts’ expectations, revenues missed, and both the top and bottom lines experienced significant drops.

There's Little Upside Left in General Electric (GE)The latter says much more about the state of GE than the former.

GE stock has been relatively lackluster over the past five years, producing a total return of just more than 60% — not bad, but about 30 percentage points worse than the S&P 500 over that time. And after General Electric’s latest report, there’s little reason to believe there’s much more near-term upside to look forward to.

GE First-Quarter Earnings

General Electric reported revenue of $29.34 billion, a 12.5% year-over-year drop that easily missed expectations of $34.23 billion. Meanwhile, GE also produced a $13.6 billion ($1.35 per share) net loss, though most of that was fueled by a $16 billion charge tied to its planned sale of assets from its financial arm, GE Capital. Backing out those charges, GE earned 31 cents per share to beat estimates by a penny.

Other notes:

  • GE was hurt by the prevailing low oil prices, as well as major currency headwinds. GE derives about 12% of its revenue from the oil & gas sector. Revenue from the oil unit dropped 8% while profit slipped 3%.
  • About 52% of the company’s revenue comes from international markets — it operates in 175 countries around the world and employs about 305,000 people — leaving it heavily exposed to currency headwinds. In fact, GE pinned close to $1 billion loss on the strong dollar.
  • GE’s core industrial segment — what General Electric is hoping to fall back on while exiting its financial businesses — was a mixed bag, with its revenue falling 3% (slightly up on constant currency) and profits up 9%.

Sale of GE Capital Baked into Shares

GE’s financial arm has acted as a huge drag on the company ever since Dodd-Frank Act determined back in 2010 that companies with large finance operations such as GE should be subjected to tougher capital and regulatory standards. GE used earnings from its then highly profitable finance arm to mask weaknesses in its other businesses for years, and when SEC fined the company heavily for subprime lending in 2008, GE was nearly brought down to its knees.

GE Capital has been labeled as a ‘‘systematically important financial institution’’ under Dodd-Frank, and the company has been working hard to trim the size of the business, from $538 billion in 2008 to $363 billion by the end of 2014. The company has a target to reduce the size of GE Capital to just $90 billion by 2018.

Well, about a week ago, General Electric announced that it planned on selling much of its assets in its GE Capital financial arm, and that it would return $50 billion from the proceeds to shareholders in the form of share buybacks.

GE estimates that divesting its financial arm will help it to eventually return around $90 billion to shareholders. (As a note, GE previously spun off its private-label credit card arm, Synchrony Financial (NYSE:SYF), in a public offering that raised $2.9 billion.)

The announcement of the sale sparked a huge rally of roughly 15% in GE stock. It’s great news for General Electric … but really the only near-term positive worth noting. And most of those gains have stuck, so it’s safe to say that at this point, optimism over the GE Capital asset sale is baked into shares.

Many Moving Parts

General Electric has many moving parts, but many of these important segments are currently underperforming; the industrial, aviation and oil segments are all struggling right now.

GE has a target that 90% of its revenue in 2018 should come from its industrial unit. Many of the company’s investors are banking on the fact that industrial companies usually sport a considerably higher valuations than financial companies. But that fact alone might not be enough to drive any significant share gains.

GE currently sports a price-to-earnings ratio of 16, which is comparable to that of United Technologies Corporation (NYSE:UTX), and only slightly lower than Honeywell International Inc. (NYSE:HON) reading of 17. That’s bad on its own. What’s worse is that UTX has been growing earnings at a 4.9% clip over the last five years while Honeywell has been growing at 17%. In comparison, GE has only been managing anemic 1.4% growth.

General Electric’s industrial unit has to get its act together for GE to start growing earnings at a more respectable clip; right now, there’s little evidence to support the notion that GE’s shrinking finance arm will help the company’s valuation in a significant way. General Electric has been shedding assets for years, and growth has been hard to come by; GE revenues have fallen from $164.3 billion in 2008 to $152.6 billion in 2014.

The company’s other segments have simply been unable to fill the void left by the shrinking finance business.

The Bottom Line

The divestiture of GE Capital assets are likely to make General Electric’s earnings more predictable, and the redistribution of cash back into shares will at least prop up the stock.

But it’s hard to see any other real catalysts for GE stock going forward. Right now, the recipe appears to be one of flat performance over the coming months at the least.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/general-electric-company-ge-stock-earnings/.

©2024 InvestorPlace Media, LLC