General Electric Company (NYSE:GE) beat Wall Street’s quarterly earnings estimate by a comfortable margin Friday morning, but top-line weakness and a cut to the revenue forecast pressured GE stock.
The culprit, once again, was the industrial conglomerate’s oil and gas business, which continues to face pressure from low energy prices amid sluggish global growth.
As a token of its appreciation for investors’ continued patience, GE helped cushion the blow of a disappointing forecast by adding another $4 billion to its share repurchase program.
Of course, what shareholders in General Electric really want is for the energy business to stop hurting results. They’ll have to wait. GE reminded investors repeatedly that it’s operating in a “slow growth and volatile environment.”
As expected, the power, aviation, healthcare and renewable energy divisions all contributed to top- and bottom-line growth. However, oil & gas and transportation were heavy drags on revenue and operating profits.
Thanks to the acquisition of Alstom, the GE of France, operating profits in the power business rose 12% to $1.1 billion on a 37% rise in revenue to $6.5 billion. In other major segments, Aviation saw operating earnings grow 10% to $1.5 billion on a 5% increase in revenue to $6.3 billion. Operating earnings in healthcare rose 10% to $717 million after revenue gained 5% to $4.5 billion.
Oil & gas, however, reported a 42% drop in operating profit to $353 million as revenue retreated 25% to just shy of the $3 billion mark.
Still Bullish on GE Stock
Taken all together, GE earnings came to $2.03 billion, or 22 cents a share, down from $2.51 billion, or 25 cents a share, in the same quarter a year ago. On an adjusted basis, which is what the Street cares about, per-share earnings were 32 cents, up from 29 cents a year ago. That beat analysts’ average estimate by 2 cents a share, according to a survey by Thomson Reuters.
Things took a bit of a darker turn on the top line: Revenue rose just 4% to $29.27 billion. Analysts were calling for revenue to grow to $29.64 billion. More troubling, on an organic basis (which strips out the effects of acquisitions and divestitures) it increased just 1%. Meanwhile, organic orders fell 6%.
There’s no question that GE’s results are disappointing, but they’re not unforgivable. They underscore the difficulty of shedding the firm’s financial businesses at a time when the oil and gas industry is depressed. The transformation back to a pure-play industrial company was always going to be an long and messy process. Macroeconomic headwinds are making it worse.
GE stock bulls shouldn’t lose hope, however. The long-term strategy is sound. The company’s investments in software, 3D technologies and other next-gen industrial businesses will pay off eventually. Oil prices are cyclical. And there was no way GE stock was better off when it was half a bet on the financial sector.
As with all value stocks, patience is key. Share buybacks and a healthy 3.2% yield on the dividend make it a bit easier to wait.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
