What Owners of GE Stock Need to Think About Before (and After) Friday

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In the midst of its divestiture whirlwind, it would have been easy to forget General Electric (GE) is on the verge of releasing last quarter’s results. But, here it is — owners of GE stock will hear the news before the market opens on Friday, July 17.

What Owners of GE Stock Need to Think About Before (and After) FridayWhat can investors expect from the GE earnings report? More than that, what else might General Electric have on tap as part of its plans to scale back on financial business and beef up its industrial ventures?

The projected top and bottom lines aren’t encouraging, but the shaky numbers may simply be a necessary part of the transition for GE stock.

GE Stock Earnings Preview

As of the latest look, General Electric is expected to post earnings of 28 cents per share for last quarter, on $28.7 billion in revenue. Both are down considerably from the year-ago comparables. The company earned 39 cents per share in the second quarter of 2014, when it drive $36.2 billion in revenue.

Bear in mind, however, the steep declines aren’t entirely an indication of waning business. A great deal of the difference has simply been driven by ongoing exits of key business lines … namely, much of its financial division.

For example, GE shed its North American consumer finance division in mid-2014 as Synchrony Financial. It also sold respiratory care and anesthesiology equipment maker Vital Signs to CareFusion in 2013 as part of its plan to focus more on its core business lines and worry less about arenas like healthcare where it can’t be a dominant player.

Although General Electric CEO Jeff Immelt has been more interested in selling than buying, acquisitions haven’t been off the table. The company is simply being selective. Coal and gas-turbine company Alstom made the grade last year.

The $17 billion deal has just been held up by French regulators who are concerned the pairing may eliminate too much competition in certain markets. Regardless, the targeted company underscores the bigger transition GE is trying to complete.

That being said, more divestitures and therefore more year-over-year weakness is in the cards for General Electric before it finally becomes what it aims to be … a company that generates 75% of its profits from its industrial divisions.

There is an offset, however — most of these divestitures are making their way back into the pockets of people who own GE stock. The sales are going to fund a $50 billion stock-buyback, and the company ultimately plans to return $90 billion worth of value to shareholders by 2018 as part of the company’s plan to shrink its way to better profits.

2 Things Weighing on General Electric

While the transition away from being a financial-centric company to one heavily focused on meeting industrial needs isn’t exactly new, a couple of impasses have surfaced to get in the way of achieving that goal.

One of them is the aforementioned freeze on the company’s acquisition of Alstom. Another is a similar balk from regulators regarding GE’s plans to sell its appliance division to Electrolux. The Department of Justice is concerned that GE, Electrolux, and Whirlpool already control 90% of the U.S. appliance market, and whittling the number of players down to only two would simply invite unfair pricing.

While nothing regarding these hurdles will show up specifically in the GE earnings numbers (past or projected), they’ll most definitely have some sort of impact on the company’s business.

The matters will likely come up in the Q&A portion of the conference call, if Immelt or General Electric’s other chiefs don’t provide updates as part of the GE earnings presentation for Q2.

Bottom Line for GE Stock

While the transition out of certain business has been the core of the story to date, most of the exits are done — or soon will be — barring any regulatory problems.

In many ways Friday’s Q2 earnings report should mark the beginning of the “new and improved” GE as much as it marks yet-another quarter of asset and division sales. To that end, a bet on GE stock from here is as is much a bet on the streamlined company’s operation as it is a bet on stock buybacks and capital-returns to owners of GE stock.

Though it won’t be a focal point on Friday, investors should start to think about the marketability of General Electric’s new and updated product line.

It has been largely overlooked, but GE spent $1 billion just to open a software center in California to stake its claim in the budding internet-of-things industry. Meanwhile, Immelt is a big fan of power infrastructure, aviation and, yes, even the oil and gas industry despite the fact that a tepid oil market is expected to crimp earnings for that segment of its product mix, which accounts for 15% of the company’s revenue.

These are initiatives that are a bit tough to get a firm grip on right now, but forward-thinking GE stock investors need to start reading between the lines and ferreting out details that point to the company’s future now that the divestitures are nearing an end.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/earnings-preview-ge-stock/.

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