It has been about a month since the last earnings report for General Electric (GE - Free Report) . Shares have lost about 0.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is GE due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
General Electric Q1 Earnings Lag Estimates, View Gloomy
General Electric has reported weaker-than-expected results in first-quarter 2020. Its earnings lagged estimates by 16.7% and revenues missed the same by 0.4%.
It noted that the coronavirus outbreak has taken a toll on its first-quarter results. GE Industrial’s free cash flow was hurt to the extent of $1 billion and Industrial profits by $0.8 billion. GE Capital’s earnings declined $0.1 billion due to the pandemic.
The industrial conglomerate’s adjusted earnings in the reported quarter were 5 cents per share, lagging the Zacks Consensus Estimate of 6 cents. Also, the bottom line declined 61.5% from the year-ago quarter figure of 13 cents.
In the quarter under review, General Electric’s consolidated revenues were $20,524 million, reflecting a year-over-year decline of 7.6%. Weakness in Industrial and GE Capital’s performances hurt the quarterly results. Also, the company’s revenues lagged the Zacks Consensus Estimate of $20,603 million.
On a segmental basis, its Industrial revenues declined 7.3% year over year to $18,844 million. Also, GE Capital’s revenues were down 13.7% year over year to $1,923 million.
For the Industrial segment, organic revenues in the quarter decreased 5% from the year-ago quarter to $18,941 million. Industrial orders declined 3% organically to $19.5 billion.
Performance of the Industrial segment’s components business is discussed below:
Aviation revenues decreased 13% year over year to $6,892 million and orders fell 14%. Organically, revenues declined 11% on a 13% decreased in orders. Notably, first-quarter shipment of LEAP engines totaled 272, reflecting a decline of 152 from the year-ago quarter.
The segmental results, especially of the commercial aerospace business, were badly affected by the coronavirus outbreak.
Healthcare revenues in the reported quarter totaled $4,727 million, increasing 1% year over year. The segment’s orders grew 7%. On an organic basis, revenues rose 2% or increased 1%, excluding the impact of divestment of the BioPharma business.
Notably, the BioPharma business generated revenues of $830 million in the quarter, reflecting 9% growth from the year-ago quarter. Organically, revenues increased 10% to $839 million.
Renewable Energy revenues totaled $3,194 million, up 26% year over year. Its orders declined 13% in the reported quarter. Organically, the segment’s sales rose 28% year over year, while orders were down 11%.
The Power segment’s revenues were down 13% year over year to $4,025 million. Notably, Gas Power revenues declined 12% year over year and that of the Power Portfolio was down 14%.
The segment’s orders increase 12% year over year. On an organic basis, the segment’s sales were down 12%, while orders expanded 14% year over year.
In the quarter under review, General Electric’s cost of sales declined 3.2% year over year to $15,695 million. It represented 76.5% of the quarter’s revenues versus 73% in the year-ago quarter. Selling, general and administrative expenses in the quarter decreased 9.9% year over year to $3,065 million. It was 14.9% of the quarter’s revenues versus 15.3% in the year-ago quarter.
The Industrial segment’s adjusted operating profit in the quarter decreased 45.7% year over year to $1,096 million, while margins decreased 410 basis points to 5.8%. On a reported basis, the Industrial segment recorded profits of $6,585 million, up 512% year over year. The Power segment recorded operating loss of $129 million against income of $110 million in the year-ago quarter, while Renewable Energy’s loss was $302 million compared with a loss of $187 million in first-quarter 2009. Aviation and Healthcare segments’ profits declined 39% and increased 15% year over year, respectively.
The GE Capital segment witnessed a loss of $194 million against earnings of $171 million in the year-ago quarter.
Interest and other financial charges decreased 25.4% year over year to $794 million.
Balance Sheet and Cash Flow
Exiting the first quarter of 2020, General Electric had cash and cash equivalents of $89.6 billion, up 5.5% from $84.9 billion recorded at the end of the previous quarter. Borrowings were $85.2 billion, down 6.3% from $90.9 billion at the end of the fourth quarter.
Adjusted free cash flow for GE Industrial totaled ($2,207) million in the first quarter as compared with ($1,216) million in the year-ago quarter.
In June 2018, General Electric communicated plans to transform into a high-tech industrial company — focused on Aviation, Power and Renewable Energy.
In sync with its plans, the company completed the sale of its transportation business to Wabtec Corporation in the first quarter of 2019. Further, General Electric completed the divestment of the BioPharma business to Danaher Corporation in March 2020. Further, General Electric lost its controlling shareholding in Baker Hughes Company.
Efforts are on track to reduce the exposure to the GE Capital business. Asset disposition has amounted to $6.4 billion in the first quarter of 2020. Also, external debts have been lowered by $10 billion year to date.
The conglomerate’s chairman and CEO — H. Lawrence Culp, Jr. — reiterated that the workers’ safety, the continuation of providing services to customers, and preserving the business strength are its priorities during the difficult period.
Notably, GE Healthcare has ramped up production of scanning and other monitoring products (including mobile X-ray systems, ventilators, CTs, patient monitors and ultrasound devices). Further, Aviation and Power are continuously providing critical services. Also, efforts are being made by General Electric to increase the production of personal protective equipment and remove supply-chain hurdles.
For 2020, the company expects cash preservation of $3 billion and operational cash out to be more than $2 billion. Also, actions to lower leverage and innovate products have been given due importance.
For the second quarter, the company expects a sequential decline in its financial results.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -424.56% due to these changes.
Currently, GE has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, GE has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.