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GE Stock Has Outperformed the Market Since Earnings, Can the Trend Continue?
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A month has gone by since the last earnings report for General Electric (GE - Free Report) . Shares have added about 5.5 % in the past month, outperforming the S&P 500 in that time frame.
Will the recent positive trend continue leading up to their next earnings release, or is the stock due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Recent Earnings
GE Beats Q3 Earnings, Misses Revenues; 2016 View Narrowed
Despite a challenging macroeconomic environment, sustained restructuring initiatives for a leaner firm with a re-focus on core operations enabled General Electric to report relatively healthy third-quarter 2016 results. GAAP net earnings for the reported quarter were $1,994 million or $0.22 a share compared with $2,506 million or $0.25 a share in the year-ago quarter. Including industrial and other verticals, operating earnings were $0.32 per share and improved 10% year over year. The operating earnings (including industrial and other verticals) for the reported quarter marginally beat the Zacks Consensus Estimate by $0.01.
Revenues
Total consolidated revenue for the reported quarter increased 4% year over year to $29,266 million from $28,028 million in the year-earlier quarter, but missed the Zacks Consensus Estimate of $29,836 million. While the Industrial segment revenue increased 4% year over year to $27,421 million, GE Capital revenues declined 2% to $2,600 million. Organic revenue growth for the Industrial segment improved 1% for the quarter.
Total orders for the quarter for the Industrial segment increased 16% year over year to $26.9 billion, with significant order improvements from the Renewable Energy and Energy Connections & Lighting segments, partially offset by considerable declines from Transportation and Oil & Gas. Total backlog of equipment and services at quarter-end was $319 billion, up 18% year over year.
Margins, Balance Sheet and Cash Flow
Owing to a highly volatile environment and sluggish growth across the globe, General Electric recorded a decline in margins in the reported quarter despite stringent cost-cutting and simplification initiatives. Industrial segment operating profit decreased 5% (organic growth down 3%) year over year to $4,320 million, with a significant fall in profits in Energy Connections & Lighting (down 84%), Oil & Gas (down 42%) and Transportation (down 18%), partially offset by a rise in profits in Renewable Energy (up 16%) and Power (up 12%). Gross margin for the Industrial segment improved 150 bps to 29.0%, while non-GAAP operating margin remained flat at 17.3%.
Cash generated from operating industrial activities (excluding dividends) for the first nine months of 2016 totaled $3,368 million. Cash and marketable securities at quarter-end aggregated $98.9 billion.
Outlook Narrowed
General Electric aims to build upon the momentum for a healthy rise in operating profit in the next year and narrowed its earlier guidance. The company anticipates operating earnings in 2016 to be within $1.48-$1.52 a share, compared to its earlier range $1.45-$1.55. The Zacks Consensus Estimate for 2016 is currently pegged at $1.49 and lies comfortably within the predicted range.
Organic revenue growth in 2016 is currently expected to be 0-2% compared to earlier projections of 2-4%. General Electric intends to return $30 billion to the shareholders in 2016, including $8 billion in dividends and $22 billion in share repurchases. In addition, the company expects to generate in excess of $32 billion in cash flow from operations in 2016, up from $30-$32 billion expected earlier.
How have estimates been moving since then?
Following the release and in the last month, investors have witnessed a downward trend for fresh estimates. In the past month, there has been one revision higher for the current quarter compared to three lower. The consensus estimate has edged lower as a result, and now GE is expected to see earnings shrink by over 11.5% this quarter when compared to the year ago period.
As you can see in the chart below, this is starting to take a toll on the outlook, both for this year and the next:
At this time, General Electric's stock has a poor Growth score of 'F', however its momentum is doing a bit better with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the fourth quintile for this investment strategy.
Overall, from a fundamental perspective, things aren't looking great for GE investors. As we can see, component scores are pretty weak, while the VGM score for this stock is an 'F'.
Outlook
With estimates broadly trending lower and a weak fundamental position, the days of outperformance for GE may be nearing an end. It's no surprise shares of GE have a Zacks Rank # 4 (sell) and we are expecting a sluggish return from GE in the next few months.
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GE Stock Has Outperformed the Market Since Earnings, Can the Trend Continue?
A month has gone by since the last earnings report for General Electric (GE - Free Report) . Shares have added about 5.5 % in the past month, outperforming the S&P 500 in that time frame.
Will the recent positive trend continue leading up to their next earnings release, or is the stock due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Recent Earnings
GE Beats Q3 Earnings, Misses Revenues; 2016 View Narrowed
Despite a challenging macroeconomic environment, sustained restructuring initiatives for a leaner firm with a re-focus on core operations enabled General Electric to report relatively healthy third-quarter 2016 results. GAAP net earnings for the reported quarter were $1,994 million or $0.22 a share compared with $2,506 million or $0.25 a share in the year-ago quarter. Including industrial and other verticals, operating earnings were $0.32 per share and improved 10% year over year. The operating earnings (including industrial and other verticals) for the reported quarter marginally beat the Zacks Consensus Estimate by $0.01.
Revenues
Total consolidated revenue for the reported quarter increased 4% year over year to $29,266 million from $28,028 million in the year-earlier quarter, but missed the Zacks Consensus Estimate of $29,836 million. While the Industrial segment revenue increased 4% year over year to $27,421 million, GE Capital revenues declined 2% to $2,600 million. Organic revenue growth for the Industrial segment improved 1% for the quarter.
Total orders for the quarter for the Industrial segment increased 16% year over year to $26.9 billion, with significant order improvements from the Renewable Energy and Energy Connections & Lighting segments, partially offset by considerable declines from Transportation and Oil & Gas. Total backlog of equipment and services at quarter-end was $319 billion, up 18% year over year.
Margins, Balance Sheet and Cash Flow
Owing to a highly volatile environment and sluggish growth across the globe, General Electric recorded a decline in margins in the reported quarter despite stringent cost-cutting and simplification initiatives. Industrial segment operating profit decreased 5% (organic growth down 3%) year over year to $4,320 million, with a significant fall in profits in Energy Connections & Lighting (down 84%), Oil & Gas (down 42%) and Transportation (down 18%), partially offset by a rise in profits in Renewable Energy (up 16%) and Power (up 12%). Gross margin for the Industrial segment improved 150 bps to 29.0%, while non-GAAP operating margin remained flat at 17.3%.
Cash generated from operating industrial activities (excluding dividends) for the first nine months of 2016 totaled $3,368 million. Cash and marketable securities at quarter-end aggregated $98.9 billion.
Outlook Narrowed
General Electric aims to build upon the momentum for a healthy rise in operating profit in the next year and narrowed its earlier guidance. The company anticipates operating earnings in 2016 to be within $1.48-$1.52 a share, compared to its earlier range $1.45-$1.55. The Zacks Consensus Estimate for 2016 is currently pegged at $1.49 and lies comfortably within the predicted range.
Organic revenue growth in 2016 is currently expected to be 0-2% compared to earlier projections of 2-4%. General Electric intends to return $30 billion to the shareholders in 2016, including $8 billion in dividends and $22 billion in share repurchases. In addition, the company expects to generate in excess of $32 billion in cash flow from operations in 2016, up from $30-$32 billion expected earlier.
How have estimates been moving since then?
Following the release and in the last month, investors have witnessed a downward trend for fresh estimates. In the past month, there has been one revision higher for the current quarter compared to three lower. The consensus estimate has edged lower as a result, and now GE is expected to see earnings shrink by over 11.5% this quarter when compared to the year ago period.
As you can see in the chart below, this is starting to take a toll on the outlook, both for this year and the next:
GENL ELECTRIC Price and Consensus
GENL ELECTRIC Price and Consensus | GENL ELECTRIC Quote
VGM Scores
At this time, General Electric's stock has a poor Growth score of 'F', however its momentum is doing a bit better with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the fourth quintile for this investment strategy.
Overall, from a fundamental perspective, things aren't looking great for GE investors. As we can see, component scores are pretty weak, while the VGM score for this stock is an 'F'.
Outlook
With estimates broadly trending lower and a weak fundamental position, the days of outperformance for GE may be nearing an end. It's no surprise shares of GE have a Zacks Rank # 4 (sell) and we are expecting a sluggish return from GE in the next few months.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 days. Click to get this free report >>