Industrial conglomerate and Dow-30 member General Electric (GE – Free GE Stock Report) has reported results for its fourth quarter. The initial reaction to the disclosure was favorable, but after dissecting all the news and listening to the conference call, the investment community sent the struggling stock about 3% lower in early morning trading.
Revenues for the three-month period came in at $31.4 billion, down roughly 5% on a year-over-year basis and below our $33.6 billion expectation. Most troubling, sales at the power division fell 15% in light of a broad decline in the global gas power market. Other areas were surprisingly solid, especially operations in the oil & gas patch, which have been struggling mightily of late. We believe the initial positive reaction to this quarterly report stemmed from the outperformance in this space. Healthcare and aviation numbers were also decent. Recall, CEO John Flannery has stated that going forward the GE focus would be three-pronged: power, aviation, and healthcare.
Quarterly earnings clocked in at $0.27 a share, or a nickel lower than our original call, which had gravitated to the consensus of $0.29 over the last few weeks, as management hinted at some signs of trouble. The headline figure was worse for the December interim because of one-time charges, one of which dominated news feeds heading into today's announcement. The company took a $6.2 billion after-tax charge at its insurance arm and disclosed that it will need to contribute $15 billion to this entity over the next several years to shore up the portfolio. With that, many headlines are trumpeting the fact that GE's loss from continuing operations exceeded $10 billion in the fourth quarter, and EPS fell into the red to the tune of $1.15. Stripping out the charges, however, we arrive at the $0.27 figure mentioned above.
One notable negative, arising at a time when sentiment around these shares is very low, is an SEC investigation that has arisen as a result of the charges taken in the insurance arena. In particular, the SEC is looking into the process that led to the reserve increase and how revenue is recognized for the long-term service contracts here. The probe is in the very early stages and management is fully complying with the authorities, but this scenario just adds to the overhangs weighing on the investment picture here at this time.
Positives from the term were on display in the earnings report as well, though. Cash performance (an area of trouble lately, which led to a dividend cut) was better. Management stated that the industrial businesses generated adjusted cash flow of $7.76 billion in the quarter. This figure should quite any bears that think an additional dividend reduction is in the cards. Elsewhere, cost-structure trimming continues in earnest. For all of 2017, $1.7 billion in structural costs were eliminated from operations. The goal had been $1 billion, and on the heels of this showing, the company says it aims to reduce expenses by another $2 billion this year. Too, the adjusted earnings guidance range for 2018 was set at $1.00-$1.07 a share. We are thus reiterating our $1.05 call. One last note, leadership disclosed that it plans to unveil the new board of directors when the 2018 proxy is released in March. In all, we think the new CEO is doing a solid job of getting all the issues on the table early so that 2018 can be the reset year the company badly needs. After that, getting back to growth will be the name of the game.
As far as a breakup of the company goes, we are not on board with that train of thought. Yes, management is looking into all strategic alternatives, but we continue to believe that is more so to eliminate slow-growth segments of the fold, and perhaps unwind deals that are no longer in the company's best interest (Baker Hughes). Too, a full breakup would likely lead to the stock's elimination from the Dow Jones Industrial Average, a scenario that is increasingly being debated on Wall Street, and one that we do not yet think is imminent.
From an investment perspective, we cannot help but like this beaten-down equity as a long-term total return play. GE shares have fallen to price levels not seen in years at a time when the overall market is on a sharp upward trajectory. Numerous blue chips are trading at all-time highs, while the longest tenured member of the Index continues to be punished. A recovery will not happen overnight, but out to 2020-2022 we think the GE picture will be much brighter once new management asserts itself fully. Over that span, the dividend should grow handsomely, and reward patient investors, too.
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.
