General Electric Company (NYSE:GE) is expected to report its best earnings and sales growth in five years before Friday’s market open, and that should help GM stock build on levels not seen since before the financial crisis.
No longer a systemically important financial institution, GE is giving its full attention to its industrial-focused future and the market is eager to see where it goes.
Sure, as a pure-play industrial, GE remains sensitive to the economic cycle. After all, it makes big-ticket industrial products like turbines, engines for trains and MRI machines. These are the sorts of things companies don’t buy when a recession is on or imminent.
Cutting capital expenditures is Recession 101.
Making matters worse, General Electric has large exposure energy prices. The company’s oil and gas business manufactures a pricey kit for everything from drilling to refining. Energy stocks have rebounded from their worst levels, but the outlook for much greater upside remains constrained.
What makes up for these old economy vulnerabilities is GE’s ambition to become what it calls a digital industrial company. It believes its Predix operating system and applications software can be the go-to platform for industrial companies, and targets 100% growth to $15 billion from digital in less than four years. As Credit Suisse analysts told clients after a recent GE meeting:
“We came away from today’s event re-assured that GE seems to be taking advantage of this potential, and aside from the revenue opportunity (Digital can not only increase the company’s topline, but also lower its sales cyclicality in market downturns, as evidenced currently in Transportation for instance) there is also a considerable productivity dividend to be reaped in the coming years.”
GE Earnings Set for Big Gains
However, the results should be more about the pickup in energy prices, offset partly by a stronger dollar on Brexit fears. On average, analysts expect earnings to come to 46 cents a share, up from 31 cents a share last year, according to a survey by Thomson Reuters. Revenue is projected to rise 8.3% to $31.76 billion, boosted by the company’s key segment of power turbines and equipment.
Of course, if GE drops a mixed report, it won’t be a surprise. The conglomerate has missed Wall Street’s top-line estimate for three straight quarters as profits have topped estimates for four consecutive reporting periods.
And let’s not forget the Brexit. The company has more than 20,000 employees in the U.K. and over 100,000 in Europe, which should make it a hot topic of conversation on the conference call with analysts.
The bottom line, however, is that GE is looking at its strongest earnings and sales report in years, and GE stock has plenty of momentum. Indeed, General Electric stock is up 5% for the year-to-date and about 10% since late June.
The market is buying the story of GE becoming a pure-play industrial with a high-tech twist. If it can deliver another earnings beat and some more upbeat commentary on emerging markets and organic growth, shares should continue to outperform in the months ahead.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.