Zacks Investment Research now holds a pessimistic view on industrial titan General Electric Company (GE), as evident from its recent downgrade to Zacks Rank #4 (Sell) from Zacks Rank #3 (Hold). The gloomy outlook comes on the heels of the disappointing guidance given by the conglomerate as it expects a downslide in oil prices to hurt its performance in 2015.
2015 Guidance
In a recent analyst meeting, General Electric said that it expects earnings per share for 2015 to lie in the range of $1.70 to $1.80. The Zacks Consensus Estimate for 2015 currently stands at $1.75 per share, down 2.2% over the last 30 days. While its overall industrial segment is expected to perform well, it anticipates revenues from the Oil & Gas business to be flat or decline by as much as 5% in the coming year.
The Oil & Gas business reportedly contributes around 25% of General Electric’s revenues from the industrial segment, and thus has a significant impact on its performance.
Effect of Oil Slide
The company’s guidance incorporated the effect of volatility in oil prices, even as aggressive cost-cutting actions are being taken to adjust to the changing landscape of the energy industry. According to media reports, the Oil & Gas segment contributes around 10% to the total profits earned by General Electric and is a high-growth unit for the conglomerate.
Dwindling oil prices have raised concerns regarding the feasibility of highly sophisticated projects, which the company is operating thousands of meters below the sea or in harsh environments such as the Arctic. Since June, when crude started its freefall, shares of General Electric have tumbled almost 6%.
Impact on Estimates & Share Price
Over the past month, General Electric has witnessed six downward earnings estimate revisions for fourth-quarter 2014, resulting in earnings estimates being slashed by 3.5% over the same period.
In terms of share price performance, General Electric has had a roller-coaster 2014 as well. General Electric, which is a sort of an industry bellwether as it usually tracks the general trend of the S&P 500, has defied its reputation. Its share price plunged nearly 10% in 2014, in comparison to an 11.4% surge in the S&P 500 over the same time frame.
Growth Prospects of Other Segments
Although Oil & Gas might prove to be a significant drag in the coming year even after intense cost-out actions, General Electric’s other industrial segments are expected to be harbingers of steady growth. The Alstom acquisition is expected to boost the Energy management and Lighting Appliances segment in the next year, while commercial aero spares and record locomotive orders look to further contribute to the company’s top line.
Also, next year would see the company taking more steps to shrink its financial arm, GE Capital, while aligning its portfolio toward core industrial operations, which is perceived as more lucrative and less risky by investors. The company aims to downsize its financial business so that it accounts for just 25% of its profits by 2016, with the remaining 75% coming from the industrial segment.
In a nutshell
Analysts widely believe that it is challenging for industrial giants such as General Electric to grow considerably faster than global GDP. As 2015 kicks off, volatility in oil prices and concerns in the Russian economy are some of the headwinds that the company is facing. The oil price decline will undeniably restrict the company’s growth to some extent, raising its dependence on gas turbines, aircraft engine orders, medical business and locomotives for generating profits.
Other Stocks to Consider
Other conglomerates with a favorable Zacks Rank that are worth considering now include Federal Signal Corp. (FSS), Swire Pacific Limited (SWRAY) and Icahn Enterprises, L.P. (IEP). While Federal Signal carries a Zacks Rank #1 (Strong Buy), Swire Pacific and Icahn both hold a Zacks Rank #2 (Buy).
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