The best that investors can hope for from General Electric Co. when the struggling industrial conglomerate reports second-quarter results before the stock market opens on Friday is boring — just plain earnings and revenue, with a little free cash flow and no drama about new charges or comments about the dividend.
Investors have had a lot to stress over the past year, as the stock has tumbled nearly 50%. The company has undergone a leadership change, cut its dividend in half, uncovered large insurance-related losses and continued to transform its focus through planned asset sales. Chief Executive John Flannery gave a confidence-rattling presentation at an industry conference in May. And earlier this month, GE’s stock GE, -1.51% was booted from the venerable Dow Jones Industrial Average DJIA, +0.22% after a record 111-year run.
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Despite investor hopes that things can’t get much worse, the stock has floundered the past several months, hitting a nine-year low as recently as June 25, as both Wall Street and credit analysts remain skeptical about the timing of any real turnaround.
Although the stock rallied briefly in late June, after GE announced plans to spin off its health-care business and sell off its ownership in Baker Hughes BHGE, +0.96% S&P Global Ratings cut its outlook on GE’s credit to negative, saying the moves would reduce diversity and potentially increase volatility in profitability and cash flow. Read more about S&P’s outlook cut.
And long-time bearish analyst Stephen Tusa at J.P. Morgan reiterated last week his underweight rating and Street-low price target of $11, which implies a 21% tumble from current levels, as he continued to question GE’s liquidity and what other cash flow problems may come to light.
While analysts may want more answers about what may be coming down the road, investors may be more interested in a clean and simple report about the company’s financial performance over the three months ended June 30, and little else.
Especially because, if investors would have paid more attention to GE’s past earnings reports, which many viewed as confusing and potentially misleading, they may have seen the troubles coming.
Here’s what investors will be looking for in Friday’s report:
What to expect
Earnings: The average analyst estimate compiled by FactSet is for adjusted earnings per share, excluding nonrecurring items, of 18 cents, down from 28 cents in the same period a year earlier.
Estimize, a crowd-sourcing platform that gathers estimates from buy-side analysts, hedge-fund managers, company executives, academics and others, as well as from Wall Street analysts, has a consensus EPS of 19 cents.
GE beat earnings expectations in the first quarter, to break a streak of three-straight misses.
In the first-quarter report, GE tried to eliminate confusion by changing what it called non-GAAP (Generally Accepted Accounting Principles) EPS that was comparable to analyst estimates to a more-standard “adjusted EPS,” and put that in bullet points on the first page of the earnings release, from “industrial operating + verticals EPS (excluding 4Q charges not included in November 13, 2017 guidance),” which wasn’t reported until page 10.
Revenue: The FactSet revenue consensus is for $29.33 billion, down from $29.56 billion last year. Estimize is projecting, on average, revenue of $30.02 billion.
GE beat revenue expectations for the first quarter, after two-straight misses.
Stock price: GE’s stock slid 1.6% in midday trade Tuesday. It has gained 1.5% since the end of the first quarter, but was still down 21.6% year to date. In comparison, the SPDR Industrial Select Sector exchange-traded fund XLI, +0.39% has slipped 2.6% this year while the S&P 500 index SPX, +0.40% has gained 5.2%.
The average rating of 19 analysts surveyed by FactSet is the equivalent of hold, while the average price target is $16.03, or about 17% above current levels. That average price target has declined from $17.50 as of the end of the first quarter, and from $21 at the end of 2017.
The stock had gained 3.9% on the day first-quarter results were reported, but had declined on the day of nine of the 10 previous reports, by an average of 1.9%. The stock gained 1.1% on the day third-quarter 2017 results were reported.
Options traders are currently pricing in a move of about 4% in either direction on Friday, based on the pricing of an options strategy known as a “straddle.”
The three remaining business segments that GE plans to focus on going forward are Power, Aviation and Renewable Energy. The following are the FactSet revenue estimates for those three segments:
• Power: $7.10 billion, up from $6.97 billion a year ago.
• Aviation: $7.22 billion, up from $6.80 billion last year
• Renewable Energy: $2.15 billion, down from $2.46 billion last year.
Free cash flow remains of interest to investors, given that the company said in November when it halved its dividend that it would focus on free cash flow (FCF) versus cash from operating activities (CFOA). Margins may also be of interest, since CEO Flannery highlighted the improvement in margins, as well as FCF, as signs of progress in its performance.
Last quarter, FCF improved to -$1.68 billion from -$2.75 billion a year ago, while margins improved to 7.7% from 5.2%.