When General Electric Company (NYSE:GE) reports quarterly earnings Friday, the focus is going to be squarely on the future, not that the company has pledged to divest itself of the bulk of its financial assets over the next two years.
Coincidentally, Synchrony Financial (NYSE:SYF) — a recent GE spinoff — also reports Friday. Between the SYF and GE earnings reports, investors will get an early look at what General Electric and its former banking assets will eventually look like in a post-spinoff world.
In the early going, the spinoff is going to be tough on GE earnings. Even under stress from strict new regulatory pressures, GE Capital remains a fountain of profits for General Electric and a key driver of GE stock.
The market is going to have to start valuing GE on the industrial parts of the conglomerate alone. Soon to no longer be a sort of hybrid financial/industrial investment, GE will probably get a higher multiple, but it was also have a lower growth rate. GE stock jumped sharply on the news of its breakup, and now the question is whether the remaining industrial assets are fully valued at the current share price.
The industrial assets are set to become the stars of earnings season, with GE Capital being of interest insofar as to the timing and price of disposing of it in parts.
On the same day, the market will be hearing from SYF, a July spinoff comprised of GE’s old private-label credit cards and retail-finance businesses. SYF earnings should offers some insights into how parts of GE Capital can fare alone.
GE Earnings Set to Fall
GE is going back to its roots as a pure-play industrial, and it’s not a moment too soon. After all, General Electric’s business is sluggish and will remain so for some time.
Earnings are forecast to fall to 30 cents a share from 33 cents a year ago, according to a survey by Thomson Reuters. Revenue is projected to remain virtually unchanged year over year. Heck, Wall Street doesn’t foresee top-line growth of just 1.6% for the full year.
Partly that reflects the double-whammy of a stronger dollar and the oil-price crash. GE generates at at least $1 billion a year from more than 20 overseas markets, so a pricier greenback can’t help but take a bite out of revenue. Furthermore, the oil and gas division is the second-most important business to GE by revenue.
After a dramatic move off the breakup news, it’s hard to see GE stock reacting strongly to earnings this time around. That said, General Electric remains a buy for long-term investors.
Meanwhile, SYF doesn’t have year-ago numbers to compare against since its underlying operations were still parts of GE Capital at the time. Analysts’ on average expect earnings to come in at 64 cents a share on revenue of $2.8 billion.
SYF is the largest provider of private-label credit cards in the U.S. by purchase volume and receivables. As such, the bull case rests on accelerating U.S. consumer spending and credit use over the next few years. Anything SYF can say that points to an increase in consumer spending should bolster the stock, but that may be a long shot.
Growth in consumer expenditures remains painfully sluggish. Even the extra cash consumers have from lower gas prices is going more toward paying down debt that being spent.
With a negative long-term growth rate, SYF looks like a hold at best barring some thesis-changing news in the SYF earnings release.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
