Diversified conglomerate General Electric Company (GE) is scheduled to report its fourth-quarter 2014 results before the opening bell on Jan 23. In the last reported quarter, General Electric’s operating earnings exceeded the Zacks Consensus Estimate by a whisker. Let’s see how things are shaping up for this announcement.
Key Factors in the Fourth Quarter
In order to focus more on its core industrial businesses, General Electric has keenly continued with its strategic restructuring initiatives. The company is actively pursuing the sale of its GE Money Bank AB (Nordics) consumer finance business to Spain’s Banco Santander, S.A. (SAN). The biggest bank of Spain agreed to acquire GE Capital's consumer finance business in Sweden, Norway and Denmark, for about $953 million. The transaction, announced in late June, is making good headway in terms of regulatory approvals. In addition, General Electric is further planning to divest its ownership stake in Polish Bank BPH SA. The diversified conglomerate has about 89% stake in Bank BPH.
2015 has been termed as a pivotal year for General Electric as it renews its strategic aim to establish itself as a manufacturing-based entity with emphasis on big-ticket items such as medical equipment and scanners. Two important milestones are slated to be achieved this year. These include the acquisition of French conglomerate Alstom’s energy assets and the pending complete spin-off of its consumer-lending arm – Synchrony Financial (SYF).
However, the Alstom deal poses significant integration risks as it requires the integration of diverse corporate cultures. The company’s objectives of simplification and productivity improvement pose both operational and execution risks. For a company as large as General Electric, the additional revenues needed for growth are quite large, posing a challenge in developing businesses on such a massive scale.
Total backlog of equipment and services at the end of the last reported quarter were record high at $250 billion. While the significant backlog of orders is a positive, current market uncertainties increase the possibility of cancellations or push outs. All these factors could drag the earnings of this company, which is one of the largest and most diversified technology and financial services corporations in the world.
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.
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 -1.82%. This indicates a likely earnings miss for the shares.
Zacks Rank: General Electric’s Zacks Rank #3 (Hold) when combined with -1.82% ESP reduces the predictive power of ESP. Note that stocks with a Zacks Ranks of #1 (Strong Buy), #2 (Buy) 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:
Arch Capital Group Ltd. (ACGL) earnings ESP of +1.92% and Zacks Rank #1.
Century Aluminum Co. (CENX), earnings ESP of +7.81% and Zacks Rank #1.
Alnylam Pharmaceuticals, Inc. (ALNY) earnings ESP of +4.55% and Zacks Rank #2.
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