Shares of General Electric (GE – Free General Electric Stock Report), an industrial conglomerate in the process of shedding its financial unit and getting back to its industrial roots, and the longest tenured Dow-30 component, fell this morning after the company reported second-quarter financials. Revenues and earnings eclipsed both our and Wall Street's expectations, but investors were apparently looking for deeper signs of prosperity to turn around the increasingly negative sentiment surrounding these shares. In turn, more shareholders headed for the exits, sending GE's quotation to lows not seen since the latter stages of 2015. For the year, this equity has lost more than 16% of its value despite a broader market rally.
From a revenue perspective, the second-quarter tally came in at $29.56 billion, ahead of the consensus call for just over $29.00 billion, but well off the previous-year's figure, which was north of $33.00 billion. Divestitures contributed to this decline, especially the sale of the appliances branch. Industrial orders, a metric we believe that will be vital going forward based on the company's shifting focus, rose 6% driven by strength in its aviation and healthcare businesses. More specifically, revenue from the power branch was up 5%, and the top line among healthcare receipts was 4% higher than in the year-earlier time frame. Conversely, the oil and gas arm continued to struggle posting a 3% drop in sales during the quarter. Subscribers will recall that GE has now combined these operations with Baker Hughes, a provider of oilfield services and equipment, to form a new publicly traded company controlled by General Electric. Minimal data is available from the early stages of this marriage, but prospects in those areas are brightening a bit, as crude prices are eventually expected to bounce back from their historic lows. For the full year, management reiterated its organic sales growth target for a gain of between 3% and 5%. In light of the higher June-period top line, we are adding $400 million to our 2017 tally, which now stands at $126.50 billion.
Earnings for the three-month interim clocked in at $0.28 a share, a lesser fall than most pundits were anticipating. Our estimate was $0.25, and many on the Street were below that. The sale of the home appliances business contributed to the decline, but there remains numerous moving parts in GE's bottom line, so we continue to stress that investors not get caught up in these figures until all of the portfolio flux is completed. Even with the better-than-expected showing, leadership chose to only back its original 2017 guidance for earnings of between $1.60 and $1.70 a share. On the strength of the June number, we are raising our expectation by a nickel to the apex of the provided bracket, or $1.70. It will be the fresh 2018 outlook from the incoming CEO, however, that will probably be the next catalyst to give some direction to GE stock as this year winds down.
This quarterly report serves as the final one in the long tenure of departing CEO Jeffrey Immelt. On August 1st, John Flannery, who has most recently led the healthcare unit, will take the reins. GE improved its cash flow and ramped up cost-cutting efforts in Mr. Immelt's final quarter, but it appears investors wanted more tangible signs that the pivot back to GE's industrial ways will be a boon. For some time, the company has floated the $2.00-a-share target as a goal for 2018, a hypothesis that most think is too aggressive, including us. Wrapped up in this earnings release was news that Mr. Flannery will conduct a thorough review of the company's business, including potential cost-cutting amounts and capital allocation plans, with plans to report to investors in mid-November. This sounds like the company will be using the reboot at the CEO position to ratchet down expectations and lower the bar for 2018. Our estimate is being held at $1.90 a share for now, but some on Wall Street are already gravitating toward the $1.80 mark. Trepidation surrounding this number is undoubtedly adding to the shareholder selloff we are seeing this morning.
We remain believers in the longer-term GE story. The dividend here is the primary draw at this time, and total-return potential out to 2020-2022 has been boosted by the stock's downturn over the last few months. Still, those looking for immediate gratification may want to look elsewhere, as the rebound will not happen overnight. Management has made significant moves to angle the portfolio for success and the time to execute on these gains is here. We understand the investor frustration stemming from the fact that GE stock has stagnated at a time where the overall market has surged, but we envision brighter days ahead.
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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
