Outgoing General Electric Company (NYSE:GE) CEO Jeff Immelt was likely hoping to end his career on a high note, perhaps with strong Q2 report that would drive the stock higher in response to earnings for the first time in seven quarters. He didn’t get it — at least not yet. GE stock is down just a little following the release of this morning’s second-quarter results, which topped expectations in terms of sales as well as earnings.
Either way, incoming chief John Flannery has plenty of items to tackle and things to tweak when he takes the helm come Aug. 1. Namely, he’s got to make the organization more profitable than it has been of late, and he’ll likely need to do so by continuing to shrink the company.
That’s no easy task.
General Electric Earnings Recap
For the period ending in late June, General Electric turned revenue of $29.6 billion into 13 cents per share. On a generally accepted accounting principles (GAAP) basis, anyway. On a non-GAAP operating basis, GE turned a profit of 28 cents per share on sales of $28 billion. The pros were calling for earnings of 25 cents per share on sales of $29.02 billion.
Though analysts generally forecast results in terms of operating results, in this case the results were considered a “beat” on both fronts for the ever-changing General Electric.
GE has now topped estimates in eight of its past nine quarters, though in most of those, per-share earnings fell and the bar was set relatively low. The company earned 51 cents per share in the second quarter of the prior year, when it generated revenue of $33.49 billion.
The weaker year-over-year expectations and results reflected the company’s continued divestiture of its GE Capital arm, among others, as well as expenses related to acquisitions.
Its power and renewable energy divisions saw significant growth, while its energy connections/lighting and transportation businesses saw sales slump on a year-over-year basis. The backlog grew from $319.6 billion a year ago to $326.8 billion now.
Jeff Immelt commented on the numbers:
“We’re looking forward to a smooth transition of the CEO position on August 1, when John Flannery becomes CEO. Since the outcome of the Board’s succession planning process was announced in June, John and I have been spending a lot of time together discussing this unique role and what he can expect in the months and years ahead. I am as confident as ever that John is going to be an outstanding leader of this great company.”
A Work in Progress
GE stock has been tough to own for some time now. Revenue has been dwindling since 2009, partially by design, and partially not. General Electric has been shedding divisions that didn’t align with its core strength in hopes that it would be ultra-competitive with its remaining units. General Electric shares even made some bullish progress in anticipation of a turnaround, but it never happened.
With an increasingly lackluster future on the horizon, GE shares had fallen 18% from their mid-2016 high — part of the reason Immelt is making his exit, albeit amicably.
Today’s action from the stock doesn’t say the market has definitively changed its mind, but the numbers do offer a glimmer of hope.
One of the first decisions Flannery will have to make is whether to maintain the stock’s present dividend payout of 96 cents per year, or 24 cents per quarter.
Some chatter had surfaced that a cut would be necessary barring any significant improvements in the company’s bottom line. Most of its recent profits have been passed along to shareholders as income — last quarter’s dividend was in excess of its GAAP profit — and activist investor Nelson Peltz feels the payout has reached uncomfortable levels.
Not everyone agrees with Peltz, however, at least somewhat on hopes Flannery will be able to deliver on his plans to improve cash flow soon. In fact, William Blair analyst Nick Heymann is looking for General Electric to as much as $20 billion by 2019, up from something around $13 billion this year. Odds are good that Flannery — pressured by Peltz — will continue to shed businesses that aren’t ideally suited for GE, allowing the company to focus on rekindling its prior industrial success.
Last quarter’s operational cash flow was $3.2 billion,though on the more relevant ‘industrial’ cash flow front, that figure is whittle down to only $1.2 billion. The company noted in its earnings-call presentation that it does expect that figure to improve during the latter half of 2017.
A big chunk of the company’s future relies on a rebound in oil and gas prices.
The merger of GE and oilfield service outfit Baker Hughes was completed earlier this month, getting General Electric deeper into the energy market at a time when oil and gas assets were beaten down. A recovery in oil prices would drive significant profit growth, protecting the dividend. Immelt was not optimistic when he spoke on the matter in May, though, suggesting the 2018 profit target of $2 per share could be tough to hit.
In fact, the company officially (though not surprisingly) lowered that figure today.
Looking Ahead for GE Stock
Prior to this morning’s news, analysts were collectively expecting Q3 income of 53 cents per share and sales of $32.29 billion — numbers that will likely change as those stock-pickers digest today’s report.
The full-year outlook will be adjusted as well, though as of the last look were pegged at a profit of $1.62 per share and sales of $125.31 billion. That top line would be a tad better on a year-over-year basis, and the per-share profit outlook is 9% stronger than 2016’s bottom line of $1.49 per share. General Electric was calling for operating earnings of between $1.60 and $1.70 per share within its Q2 presentation.
Between the recent pullback and optimistic outlook — and factoring in today’s — some observers may be tempted to dive in. As Vince Martin suggested on Wednesday, though, “There are real risks relative to GE stock — which means investors need to see real potential returns, not just a solid dividend. And it looks like it will take some time — likely years — before GE is even ready to drive the earnings growth needed to justify the current risks.”
That’s the long way of saying Flannery has a lot of work cut out for him. Nothing about today’s second-quarter report changes this reality.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
