General Electric, (GE- Free General Electric Stock Report) an industrial conglomerate in the process of selling off its financial unit in an effort to get back to its industrial roots, has posted third-quarter financials for 2017. The revenue figure beat both our and Wall Street's expectations, but earnings missed the mark by a wide margin, and the full-year bottom-line outlook was trimmed by a substantial amount. The stock fell nearly 8% in value immediately following the release; however, the quotation has settled in roughly 1%-3% lower after the news was digested by the investment community.
From a revenue perspective, the company reported a year-over-year increase north of 14%, to $33.47 billion, ahead of our $32.71 billion call. The completed acquisition of oil-field services concern Baker Hughes contributed handsomely to this outperformance. Still, operations are not performing all that well. We have cautioned investors in the past to zero in on the industrial performance because that was the future of the company, but even some of those aspects are struggling. Of note, the power business has seen a dropoff in its showing over the past three months. Also, the oil and gas arm, which is now a larger piece of the puzzle, continues to struggle under the burden of historically lower pricing in that patch.
For the September quarter, earnings came in at $0.29 a share, excluding restructuring costs and some other one-time items. We were looking for $0.50 a share. This represents General Electric's largest EPS miss in a long time and comes at a time when investor confidence in this stock was already waning. Moreover, this showing was a 9% dip versus the third quarter of 2016. Profits at the power arm were roughly 50% lower and the oil/gas platform swung to a loss in the three-month period. In response to the shortfall, management has cut its full-year profit outlook to a range of $1.05 to $1.10 per share, a far cry from the previously provided bracket of $1.60 to $1.70. Consequently, we are reducing our call by $0.45 a share, to the apex of the newly minted spread, or $1.10. It is also safe to say that leadership's hopes of reaching $2.00 a share in earnings by 2018 is no longer within the realm of possibilities. This was new CEO John Flannery's first earnings announcement in the top executive position, and we anticipate much more color next month, on a number of topics, after Mr. Flannery completes his thorough review of all company business, which was promised at the time of his promotion.
Questions about a potential dividend cut continue to swirl around these shares. This quarter's troubles were a stark reminder that this company has a lot of work still to do in its turnaround efforts. Year-to-date cash flow after nine months currently sits at under $2 billion. The initial goal of having $12 billion to $14 billion in these coffers is no longer a reality. Indeed, a $7 billion in-house target has now been set, but it would theoretically take $8 billion to fund the current dividend. Mr. Flannery has been making headlines for clearing out the excesses of the past regime and restructuring/reorganization will likely be a theme of his November conference. But these changes take money, too. It looks like share repurchases will be lessened, and plans to trim $2 billion in annual costs are ongoing. Moreover, dipping into the debt market is a possibility, albeit an unsustainable one. In sum, we were previously of the belief that no dividend reduction was coming, but after today's report we can no longer make that assertion with confidence. Operations firming up in a hurry would save the payout at current levels, but we believe the market has already begun pricing in a forthcoming trim.
With all this said, does GE stock carry any investment merit? We think the answer is yes. We gather that if the quarterly dividend were to be trimmed, it would fall to about the $0.14-a-share mark. Such a figure still represents a yield that exceeds the Value Line average. That level of income is enough of a reward for very patient investors to stay on board long term, while management goes through the process of pivoting back to GE's industrial roots. The stock is down significantly in calendar 2017, at a time when the Dow Jones Industrial Average is setting new all-time highs, so the entry point in the current market is solid. All eyes will be on the November companywide update from the CEO, which should bring with it a heavy trading day one way or the other.
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.
