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GE Q2 Earnings & Revenues Beat Estimates, 2016 View Firm

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Despite a challenging macroeconomic environment, sustained restructuring initiatives for a leaner firm with a re-focus on core operations enabled General Electric Company (GE - Free Report) to report strong second-quarter 2016 results. Operating earnings for the reported quarter were $3,613 million or 39 cents a share compared with $2,127 million or 21 cents a share in the year-ago quarter. Including industrial and other verticals, operating earnings were 51 cents per share and improved 65% year over year. The operating earnings (including industrial and other verticals) for the reported quarter comfortably exceeded the Zacks Consensus Estimate by 5 cents.

On a GAAP basis, the company reported net income from continuing operations of $3,281 million or 36 cents per share compared with $1,679 million or 17 cents per share in second-quarter 2015. The remarkable improvement in reported earnings was primarily due to a reshuffle in the operating portfolio and divesture of GE Capital assets to reduce the volatility in earnings and focus on the strong industrial roots of the company.

Revenues

Total consolidated revenue for the reported quarter increased 15% year over year to $33,494 million from $29,226 million in the year-earlier quarter, and well exceeded the Zacks Consensus Estimate of $30,844 million. While the Industrial segment revenue increased 7% year over year to $28,630 million, GE Capital revenues improved 3% to $2,771 million. Organic revenue growth for the Industrial segment declined 1% for the quarter due to slow growth and volatile environment.

Total orders for the quarter for the Industrial segment decreased 2% year over year to $26.6 billion, with significant order declines from the Transportation and Oil & Gas segments. Total backlog of equipment and services at quarter-end was record high at $320 billion, up 17% year over year.

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Revenue by Segment

During the reported quarter, Oil & Gas revenues declined 22% year over year as expected due to macroeconomic headwinds and volatility in oil prices to $3,219 million, while Energy Connections revenues increased 55% to $2,734 million due to positive contribution from Alstom. Revenues from Aviation segment were up 4% year over year to $6,511 million largely due to higher services revenue. Transportation revenues declined 13% year over year to $1,240 million on lower locomotive deliveries.

Power segment revenue was up 31% year over year to $6,639 million with strong execution of projects. Appliances & Lighting segment reported revenues of $1,667 million, down 25% year over year driven by partial quarter. Revenues from the Healthcare segment improved 4% to $4,525 million due to solid volume and cost productivity. Revenues from the Renewable Energy segment were up 28% year over year to $2,094 million largely due to higher turbine shipments owing to Alstom.   

Revenues from the GE Capital segment increased 3% year over year to $2,771 million. During the first six months of the year, GE Capital returned $11 billion in dividends to parent General Electric and remained on track to reach the tally of $18 billion in 2016. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $79.3 billion at quarter-end, down 55.8% 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 6%) year over year to $4,122 million, with a significant fall in profits in Energy Connections (down 57%), Oil & Gas (down 48%) and Appliances & Lighting (down 42%), partially offset by a rise in profits in Healthcare (up 11%) and Power (up 9%). Gross margin for the Industrial segment improved 70 bps to 27.3%, while non-GAAP operating margin remained flat at 14.2%.  

Cash generated from operating industrial activities (excluding dividends) for the quarter totaled $33 million. Cash and marketable securities at quarter-end aggregated $91.8 billion.

Restructuring Initiatives

General Electric is actively pursuing its massive restructuring initiatives in order to create a simpler and nimbler firm. From a classic conglomerate with diversified business interests in financial services, media, industrial and technology-based operations, the company is pruning its operating portfolio to focus on core manufacturing businesses with a digital edge.  

Since Apr 2015 through the end of Jun 2016, GE Capital inked sale agreements worth approximately $181 billion in ENI, of which it has already completed deals worth $158 billion. The transactions are in conformity with the corporate strategy of building a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to comprise over 90% of its total operating earnings by 2018, up from 58% in 2014.

During the reported quarter, General Electric completed the divesture of its appliance business to Haier Group, a Chinese multinational consumer electronics manufacturing firm. The transaction unlocked incremental value by allocating more resources to high-growth core industrial businesses. Other notable divestures during the quarter include the sale of GE Capital’s restaurant franchise financing assets in the U.S. The transactions include about $1.4 billion in ENI and are likely to yield $0.2 billion of capital to General Electric.

Also during the quarter, General Electric had initiated steps to supplement its digital presence in Europe and foster growth of the industrial ecosystem for the continent’s overall development. The company opened a new digital office in Paris – Digital Foundry, which is likely to be the hotbed for the industrial ecosystem. The Digital Foundry forms a global network of centers through which GE Digital intends to incubate local startups, form client collaborations to develop new applications and extend the burgeoning community of industrial developers in Europe. This industry-pioneering program will likely help General Electric to gain a competitive edge over peers, grow its customer base and generate higher revenues by expanding its IT portfolio.

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Outlook Reiterated

Despite soft macroeconomic conditions and expectations of weak global growth in 2016, General Electric aims to build upon the momentum for a healthy rise in operating profit in the next year and reiterated its earlier guidance. The company anticipates operating earnings in 2016 to be within $1.45-$1.55 a share. The Zacks Consensus Estimate for 2016 is currently pegged at $1.50 and lies comfortably within the predicted range.

Organic revenue growth in 2016 is expected to be 2-4%. In addition, General Electric intends to return $26 billion to the shareholders in 2016, including $8 billion in dividends and $18 billion in share repurchases. In addition, the company expects to generate $30-$32 billion in cash flow from operations in 2016.

The company has started its exit from the financial business and has increased its investments in core industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. We remain encouraged with the restructuring endeavors.

General Electric currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Honeywell International Inc. (HON - Free Report) , Leucadia National Corporation and Swire Pacific Limited (SWRAY - Free Report) , each carrying a Zacks Rank #2 (Buy).

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