General Electric (GE) Q4 Earnings Lag Estimates, Revenues Beat

General Electric Company GE reported weaker-than-expected results in fourth-quarter 2018, delivering a negative earnings surprise of 5.6%. This was the company’s second consecutive quarter of lagging earnings estimates.

This industrial conglomerate’s adjusted earnings in the reported quarter were 17 cents per share, below the Zacks Consensus Estimate of 18 cents. Also, the bottom line reflected 60% decline from the year-ago tally of 43 cents due to weak margins in the quarter under review.

For 2018, the company’s adjusted earnings were 65 cents per share, down 35% year over year. It lagged the Zacks Consensus Estimate of 67 cents.

Industrial and GE Capital Drive Revenues

In the quarter under review, General Electric’s consolidated revenues totaled $33,278 million, reflecting year-over-year growth of 5.3%. The improvement came on the back of healthy growth in Industrial revenues and solid performance of GE Capital. Also, the top line surpassed the Zacks Consensus Estimate of $32.23 billion.

On a segmental basis, the company’s Industrial revenues increased 2.1% year over year to $31,213 million. The segment’s organic revenues grew 8% over the year-ago quarter to $32,224 million.

Performance of the Industrial segment’s components businesses are discussed below:

Oil & Gas revenues increased 8% year over year to $6,250 million on the back of 21% growth in orders. Aviation revenues grew 21% to $8,456 million on the back of 12% growth in orders, driven by growing popularity of LEAP engines and F414 engine. Healthcare revenues in the reported quarter totaled $5,398 million, increasing 2% year over year while orders were down 2%.

Revenues from the Lighting segment were down 16% year over year to $451 million while its orders declined 16%. Renewable Energy revenues totaled $3,361 million, up 28% year over year and its orders increased 19% in the reported quarter.

Transportation revenues increased 24% year over year to $1,152 million while its orders were down 48% year over year. The collaboration of this business with Wabtec Corporation WAB is anticipated to be completed in February 2019. Power segment’s revenues were down 25% year over year to $6,760 million while orders declined 19%.

GE Capital’s revenues in the reported quarter totaled $2,476 million, surging 60.3% year over year.

For 2018, the company’s revenues totaled $113,543 million, reflecting growth of 2.3% from the previous year. The top line surpassed the Zacks Consensus Estimate of $121.4 billion.

Margins Suffer Y/Y

In the quarter under review, General Electric’s cost of sales increased 2% year over year to $25,876 million. It represented 77.8% of the quarter’s revenues versus 80.2% in the year-ago quarter. Selling, general and administrative expenses in the quarter increased 4% year over year to $4,565 million. It was 13.7% of the quarter’s revenues versus 13.9% in the year-ago quarter.

The Industrial segment’s adjusted operating profit in the quarter decreased 16% year over year to $2,328 million while margins fell 150 basis points to 7.5%. On a segmental basis, operating performance suffered from a decline in Power (recorded loss in the reported quarter versus profits in the year-ago quarter), Renewable Energy (down 51%) and Transportation (down 16%), partially offset by an improvement in profits in Oil & Gas (up 60%), Aviation (up 24%), Healthcare (up 2%) and Lighting (recorded profits in the reported quarter versus loss in the year-ago quarter).

The GE Capital segment incurred loss of $86 million in the quarter under review.

Balance Sheet and Cash Flow

Exiting the fourth quarter of 2018, General Electric had cash and cash equivalents of $68.9 billion, up from $61.7 billion recorded at the end of the previous quarter.

Adjusted free cash flow from GE Industrial totaled $4,850 million, down compared with $6,792 million in the year-ago quarter.

Restructuring Actions

In June 2018, General Electric communicated plans to transform itself into a high-tech industrial company — focused on Aviation, Power and Renewable Energy. It will separate GE Healthcare and turn it into a stand-alone company while exiting oil and gas businesses by disposing of its 62.5% interest stake in Baker Hughes, a GE company BHGE (actions have been accelerated). Beside these, GE Transportation will be sold to Wabtec Corporation (agreement reached to increase its retained stake in its transaction).

It is worth noting here that the company substantially completed (or signed) $20 billion of assets sales planned for GE Industrial in 2018.

Efforts are on track to shrink exposure in GE Capital business. Assets disposition amounted to $15 billion in 2018, including $8 billion completed in the fourth quarter. Also, the company reduced debt (external) by $21 billion in the year.

Outlook

General Electric anticipates retaining $10 billion cash from its Wabtec and Baker Hughes transactions as well as from lowered quarterly dividend rate. Further, the company believes that it will gain from restructuring of the Power business, combining grid and renewable assets with Renewable Energy, launch of the digital business, and focus on expanding commercially in emerging markets.

General Electric Company Price, Consensus and EPS Surprise

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