Shares of General Electric, (GE- Free General Electric Stock Report) an industrial conglomerate in the process of returning to its industrial roots and a Dow-30 member, were up as much as 7% this morning after announcing first-quarter results. Bears quickly cited over enthusiasm, however, and about half of that gain was given back by lunch time. The showing was better than expected and some on Wall Street are saying that the worst of times may be in the rearview mirror for this beleaguered blue chip. Perhaps even more important, management reiterated its full-year profit outlook at a time when the investment community was likely bracing for a guidance cut.
In terms of revenues, the top line came in at $28.66 billion, ahead of our $27.62 billion call and up 7% on a year-over-year basis. We did not like what we saw in the power business, but the remainder of the portfolio held up admirably. Contributions from the Baker Hughes merger helped move the needle, though admittedly that entity has room for improvement. Too, GE's revenues from industrial operations fell 4%, to $23.8 billion, dragged down by the ongoing issues in the power segment. Conversely, jet engine receipts were up 7% and aviation, in general, had a good quarter. Transportation and healthcare provided additional pockets of strength. Separately, backlog and new order metrics were stout. The industrial segment saw its backlog jump 7% to close out the March quarter at $372.3 billion. New orders climbed 10%, to $27.4 billion, but some of this enthusiasm was eliminated by a dip in orders in the power unit that approached the 30% threshold.
From an earnings perspective, adjusted share net registered $0.16 in the three-month period, a penny ahead of our expectations and a few cents better than the slightly more bearish average Wall Street view. EPS was fueled by better profit performances in the aviation, healthcare, and renewables categories. Detractors included the aforementioned power arm and continued woes in the oil & gas patch, where prices remain below historic levels, which in turn, eats into margins. Still, this earnings showing is a step in the right direction, especially when considering the power business is expected to be a major driver and it is certainly not pulling its weight at this juncture.
Some other items that need to be focused on for the quarter are the developments on the cost-cutting front. Recall, management's plan is to strip $2 billion in costs this year from the overall structure of the company. To that end, $850 million in expenses were trimmed in the first quarter alone. Elsewhere, cash flow improved by more than $1 billion in the period for the industrial space, though it still remains in negative territory. Regardless, the fact that this metric steadied and was better should quiet some of the crowd that is expecting another reduction to the dividend. One last caveat, there was a $1.5 billion charge related to liabilities in a subprime lender it once owned that is now part of a federal investigation. Obviously not ideal, but size wise it does not move the needle all that much compared to the types of announcements GE has been disclosing over the past few months.
The full-year 2018 EPS outlook was reiterated in a bracket of $1.00 to $1.07. With that, we are holding our call firm at the $1.00 mark. Yes, CEO John Flannery stated that the results were trending toward the lower end of the provided range. That is to be expected as long as the power branches do not show any signs of life in the coming months. Our top-line view is being ratcheted up to reflect the March-quarter strength. That number now stands at $125 billion even.
Many are already pondering if today's positive news can lead to GE shares remaining in the Dow Jones Industrial Average. We have long been proponents of this stalwart staying in the Index, but admittedly, we now find that unlikely. The committee that manages the Dow likes to keep the ratio of the highest-priced stock and its lowest close to 10-1. With Boeing shares north of $335 and GE south of $15, that spread is sitting at more than double that preference at this time. History only goes so far in the investment world and this math is tough to ignore. If removed, some pundits are calling for the addition of a FANG Amazon(AMZN) and Alphabet (GOOG), due to their popularity and share prices. We think an industrial should be replaced by a member of its brethren and therefore believe Honeywell (HON) is likely in pole position at this time.
Even factoring in this morning's share-price incline, we like GE stock from a long-term perspective. The turnaround will not happen overnight. Mr. Flannery has been clear that the process will take a year or two. Patient investors may well be rewarded handsomely out to 2021-2023 if they get in under the $15-a-share mark. An above-average dividend, even after the recent cut, should provide income as shareholders wait for more concrete signs that operations are continuing to mend.
About The Company: Founded in 1892, General Electric Company has grown into one of the largest and most diversified industrial companies in the world. With products ranging from aircraft engines, power generation, oil and gas production equipment, and medical devices. It is in the process of completely divesting its sizable finance operations under its GE Capital Exit Plan. It serves customers in more than 180 countries. On a geographic scale, 57% of General Electric's revenues came from overseas in 2016.
— Erik M. Manning
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
