Diversified conglomerate General Electric Company (GE) is scheduled to report its third-quarter 2014 results before the opening bell on Oct 17. In the last reported quarter, General Electric’s operating earnings failed to spring any surprise and exactly matched with the Zacks Consensus Estimate. Let’s see how things are shaping up for this announcement.
Growth Factors in the Third Quarter
In order to focus more on its core industrial businesses, General Electric has taken certain strategic restructuring initiatives during the soon-to-be-reported quarter. The company inked a definitive agreement with premier electronics manufacturer Electrolux AB to divest its appliance unit for $3.3 billion. The divestiture, valued at 8.0x trailing EBITDA (earnings before interest, taxes, depreciation, and amortization), will generate an approximate after-tax gain of 5–7 cents per share at closing. As General Electric contemplates $4-billion worth of divestitures in 2014 to increase its liquidity and focus on high-margin industrial activities, the appliance business fitted the bill perfectly.
In addition, General Electric spun off its consumer-lending arm Synchrony Financial (SYF) in an initial public offering (IPO) in July as the first concrete step to shrink its finance business by 2015. This strategic move is arguably the biggest step in restructuring GE Capital’s portfolio to shield the parent company from intense market volatilities that plagued the market during the 2008-09 financial crisis. The spin-off will realign the corporate strategy of General Electric to a manufacturing-based entity with emphasis on big-ticket items such as medical equipment and scanners.
With such strategic moves, General Electric expects operating earnings from its industrial business to aggregate 75% of the corporate operating earnings by 2016. The company is currently on track to achieve its goal of $1 billion cost-cuts in the year.
Over the last couple of years, General Electric has expanded by about 15% each year in growth markets. During the last reported quarter, orders from growth markets were up 6% as six out of nine regions witnessed revenue rise. General Electric is also anticipating huge infrastructure orders to the tune of $10 billion in 2014 from Latin America on the back of surging demands for improved facilities for basic amenities and well being. During the next few years, General Electric expects revenues to increase 10–15% annually in Latin America, buoyed by higher demand to cater to the infrastructure requirements for industrial services such as power generation, transportation, water and oil.
Earnings Whispers
Despite the best attempts to restructure its business, our proven model does not conclusively show that General Electric is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.
Zero Zacks ESP: Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This indicates a likely in line earnings for the shares.
Zacks Rank #3 (Hold): General Electric’s Zacks Rank #3 reduces the predictive power of ESP. Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.
Other Stocks to Consider
Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Abaxis, Inc. (ABAX), earnings ESP of +4.55% and Zacks Rank #2 (Buy).
ACE Limited (ACE), earnings ESP of +5.15% and Zacks Rank #2 (Buy).
Alaska Air Group, Inc. (ALK), earnings ESP of +1.45% and Zacks Rank #2 (Buy).
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