General Electric (GE) stock popped Friday after GE earnings topped Wall Street’s expectations, driven by its retreat from financial services to become a pure-play industrial.
Although, there’s no doubt this GE earnings report boosts the bull case on GE stock, it also underscores how difficult it is to be a multinational industrial in a world of sluggish growth, low oil prices and a strong dollar.
After all, the collapse in crude oil prices contributed to a revenue miss. Lower demand for GE’s wares from customers in the oil and gas business were to blame. As has been well documented this earnings season, a stronger dollar is no friend to companies doing business overseas.
That said, GE earnings also showed the benefits of offering a wide portfolio of goods and services. Strength in the divisions that manufacture jet engines and power turbines cushioned the blow from from the rout in prices for crude.
All told, GE earnings make it plain that the company’s drastic decision to jettison almost all of its financial operations is the right strategic move. Current macroeconomic headwinds are serious issues for an industrial-only GE, but they won’t be around forever.
And on a core basis, most of the manufacturing segments looked pretty good.
GE Earnings Beat the Street
For the most recent three-month period, GE earnings came to $2.51 billion, or 25 cents per share, down from $3.54 billion, or 35 cents per share, a year ago.
However, analysts and the market only care about adjusted earnings. After stripping out special items, GE earnings came to 29 cents per share. Analysts, on average, were looking for earnings of 26 cents per share, according to a survey by Thomson Reuters. In other words, GE earnings topped Wall Street estimates by a comfortable margin.
A 16% drop in the segment that provides equipment and services to the oil and gas industry weighed on top-line results, partially offset by a 5% increase in the aviation business and a 1% gain in the water and power division.
In total, however, the $27.95 billion in revenue from the industrial part of GE fell short of Street projections for $28.57 billion. Helpfully, as with many reports this earnings season, the market gave GE stock a pass on the top-line miss.
Ultimately, the market likes GE’s plan and the progress it’s making. Heck, GE stock is up 13% YTD in a bad year for equities. The S&P 500 is off 1.5% over the same span.
Just as important, the market loves all the cash GE is returning to shareholders. GE said its share exchange in spun-off Synchrony Financial (SYF) will start next week. With proceeds of anywhere from $18 billion to $21 billion, GE will be able to buy back 6% to 7% of its stock.
GE stock looks good as a long-term holding under these circumstances. As noted above, the macro issues won’t last forever, and the disposal of GE Capital is clearly a good idea. (And don’t forget that industrial stocks get higher multiples than financials.)
The short term is pretty positive too. GE stock is one of the few mega-cap blue chips working this year. Don’t be surprised if investors chase performance for some year-end window dressing.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
