It was by no means a knockout quarter, but General Electric Company (GE) gave bulls something to chew on when GE earnings showed resilience amid the punishing drop in prices for oil and gas.
GE is getting out of financial services, but a pure-play industrial stock is a tough sell in world of slower growth and tumbling energy prices.
Despite those obstacles, GE earnings did manage to beat Wall Street’s average estimate despite sales coming up short.
CEO Jeff Immelt said GE “executed well in a slow-growth environment,” and even after a volatile start to the year, the full-year outlook remains intact.
Whether the outlook can hold up through 2016 is probably a coin flip at this point, but the CEO’s characterization of how well GE did is fair enough.
With oil prices down 70% from their peak, GE can’t escape the damage from that rout. No, we’re not talking Exxon Mobil (XOM) or Kinder Morgan (KMI), but its exposure is substantial.
Revenue in the oil and gas segment fell 16% and segment profit tumbled 19%. In the renewable energy business, revenue declined 16% and earnings shed 79%. The power segment grew 3%, but only because of GE’s acquisition of Alstom. Either way, the division also reported a drop in income.
GE knows that there’s more pain ahead. The company expects oil and gas revenue to decline by about 15% this year. That’s forced GE to find another $400 million in segment cost cuts in addition to the $400 million it’s already targeted.
Diversification Saves GE’s Day
But not everything is so gloomy. GE is a diversified industrial and some of the segments remain healthy.
Aviation grew 5% on the top line and 12% on the bottom. Transportation delivered revenue and profit gains of 2% and 8%, respectively.
That diversified model, along with cost controls, helped GE earnings top Street estimates, and that’s something investors always like to see.
For the three-month period ended Dec. 31, GE earnings came to $6.28 billion, or 64 cents a share, up from $5.15 billion, or 51 cents a share, in last year’s fourth quarter.
On an adjusted basis — which is what the Street cares about — GE earnings hit 52 cents a share. Analysts, on average, expected earnings of 52 cents a share.
Revenue rose less than 2% to $33.89 billion against a forecast for $35.96 billion.
True, the collapse in energy prices couldn’t have come at a worse time for GE now that it’s ditching most of its financial businesses. After all, investors are now looking at it as a pure-play industrial name.
That doesn’t dent the bull case on GE, however. The strategy of shedding GE Financial is a wise one, but it’s going to take time. And it’s not like the current macroeconomic troubles are going to be permanent conditions. It’s called a business cycle for a reason — it goes round and round.
As for GE shares, bear markets happen (if that is, indeed, what we’re looking at). They’re not permanent either.
For the first time in a long time, this component of the Dow Jones Industrial Average looks like a stolid blue-chip bet.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
