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Pause, Trim, Reboot: GE Power Renders 12,000 Job Cuts

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Confirming industry wide speculations, General Electric Company (GE - Free Report) unveiled its plans to lay off 12,000 employees across the globe in its GE Power business, as part of its corporate objective to lower operating costs and improve profitability. The drastic step seems to be the call of the hour as the beleaguered company aims to restructure its power business in tune with the evolving market conditions.

With about $27 billion revenues in 2016, GE Power was the largest business segment of the company in terms of corporate revenues. However, the business has been a drag on earnings in the last few quarters as global demand waned with increasing popularity of renewable energy sources, overcapacity, lower utilization and fewer outages. Industry experts opined that the acquisition of Alstom’s assets for $10 billion in 2015 further compounded the problems for GE, as it increased the employee count by approximately 65,000 with the addition of several field offices and manufacturing sites across the world. It seemed as if GE erred in its judgment about market demand and gambled on an industry that was on a decline.

GE intends to execute the job cuts over the next 18 months, with about half of them taking place in Europe, namely France, Germany and Switzerland. The strategic move is also in tune with the broader goal of the industrial goods manufacturer to integrate the energy connections and power businesses with GE Power, seeking to save about $1 billion in costs in 2018 and an additional $500 million in 2019. The latest layoff follows a similar exercise last month, when GE trimmed staff at its interim corporate headquarters in Boston and eliminated about 100 sales positions within the GE Digital division. According to Bloomberg, GE has announced a total of 19,242 job cuts in 2017 — the most by any U.S. company in the year.     

The continued reduction in employee headcount is aimed at scripting a turnaround for the 125-year-old conglomerate by reducing operating costs and strengthening its liquidity. Shares of GE have underperformed the industry year to date, with an average loss of 43.9% compared with a decline of 5% for the latter. In order to boost the company’s sagging shares, CEO John Flannery has also decided to focus on just three core segments — power, aviation and health-care equipment — and gradually exit all other businesses. In addition, GE aims to improve its profitability by reducing overhead costs by $2 billion in 2018, majority of which is likely to come from the beleaguered power segment that sells electrical generation equipment. GE further intends to sell assets worth $20 billion to improve its liquidity.


 

Flannery has termed 2018 as a reset year and expects the company to stage a turnaround to reward its shareholders with risk-adjusted returns. Critics, however, have widely raised concerns about the efficacy of such steps.

GE has a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the industry include Danaher Corporation (DHR - Free Report) , 3M Company (MMM - Free Report) and Leucadia National Corporation (LUK - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Danaher has a long-term earnings growth expectation of 10.6%. It surpassed estimates in each of the trailing four quarters with an average positive surprise of 2.6%.

3M has a long-term earnings growth expectation of 10.2%. It delivered an earnings beat thrice in the trailing four quarters with an average positive surprise of 2.5%.

Leucadia has an expected long-term earnings growth rate of 18%. It exceeded estimates thrice in the last four quarters with an average beat of 21.2%.  

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