General Electric Company (NYSE:GE) exceeded Wall Street’s profit and sales estimates, but a drop in orders tempered investor enthusiasm for what was a promising quarter in a tough global economy.
The sprawling industrial conglomerate’s diversity served it well in the most recent period, as strength in the aviation and power and healthcare segments offset continued weakness in transportation and oil and gas.
Be that as it may, orders — a key measure of demand — slipped 2%. On an organic basis, which strips out the effects of mergers, acquisitions and currency, GE’s orders fell 16%.
No question, that’s a blemish, but the market should hardly be surprised amid global sluggishness and macroeconomic uncertainty. It’s not like the looming implications of the Brexit are a confidence builder for GE or its customers.
That said, GE’s move to become a diversified pure-play industrial with digital ambitions makes a lot of sense, as the latest quarter shows. There’s not much upside to be found in maintaining extensive financial operations under special Federal Reserve oversight when the industrial side has shown that it can grow in the current challenging environment.
As CEO Jeff Immelt said in a media release:
“The diversity and scale of our portfolio enabled the company to perform well despite a volatile and slow-growth economy. We expect strong organic growth in the second half of the year.”
GE Stock Doesn’t Take It Well
Shares in GE dropped significantly on the earnings report even after trading lower over the last few sessions in anticipation. But you can’t feel too bad for shareholders. True, GE stock has been a market laggard for much of 2016, but over the last 52 weeks it’s up 20%. It’s fair to say the market strongly approves of GE’s historical pivot.
And well it should. For the most recent quarter, GE had earnings of $2.74 billion, or 36 cents a share, compared with a loss of $1.36 billion, or 17 cents a share, a year earlier. On an adjusted basis — which is what the Street cares about — profit came to 51 cents a share. That easily surpassed analysts’ average estimate of 46 cents a share, according to a survey by Thomson Reuters.
Revenue grew 15% to $33.5 billion to beat the Street forecast of $31.76 billion. Although the top line was better than expected, the market was disappointed in softness in the core business, as industrial organic revenue fell 1% to $24.4 billion. But it was a 2% decline in orders to $12.9 billion that put the most pressure on GE stock.
Most importantly, GE reaffirmed its full-year profit forecast. It also reminded investors that it can do all sorts of things with its solid balance sheet now that it’s no longer designated as a systemically important financial institution. Here’s Immelt again:
“We will continue to invest in key growth initiatives such as GE Digital, while returning [about] $26 billion to investors through buyback and dividends.”
An unblemished earnings report would have been preferable, but there was nothing in there that changed the investment thesis on GE stock. It hasn’t looked this good as a total return vehicle in years.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
