Why Is GE (GE) Down 18.4% Since Last Earnings Report?

A month has gone by since the last earnings report for General Electric (GE). Shares have lost about 18.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is GE due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

General Electric Q4 Earnings and Sales Beat Estimates

General Electric delivered better-than-expected results for fourth-quarter 2019 with earnings surpassing estimates by 16.7%.

The industrial conglomerate’s adjusted earnings in the reported quarter were 21 cents per share, surpassing the Zacks Consensus Estimate of 18 cents. Also, the bottom line grew 50% from the year-ago quarter figure of 14 cents.

For 2019, the company’s adjusted earnings were 65 cents per share, increasing 14% from the previous year. Also, the bottom line surpassed the Zacks Consensus Estimate of 61 cents.

Revenues

In the quarter under review, General Electric’s consolidated revenues totaled $26,238 million, reflecting a year-over-year decline of 1%. Healthy Industrial performance was offset by weakness in GE Capital. However, the company’s revenues surpassed the Zacks Consensus Estimate of $26,162 million by 0.3%.

On a segmental basis, its Industrial revenues grew 2.5% year over year to $24,486 million. The segment’s organic revenues rose 4.6% from the year-ago quarter to $24,672 million. Industrial orders declined 3% organically while backlog (at the end of the quarter) was $405 billion.

Performance of the Industrial segment’s components business is discussed below:

Aviation revenues grew 5.7% year over year to $8,936 million, while orders increased 22%. Organically, revenues expanded 7% on 23% growth in orders. Notably, fourth-quarter shipment of LEAP engines totaled 420, reflecting increase of 41 from the year-ago quarter.

Healthcare revenues in the reported quarter totaled $5,402 million, flat year over year. The segment’s orders grew 2%. On an organic basis, revenues rose 1% on 3% growth in orders.

Renewable Energy revenues totaled $4,747 million, up 2.2% year over year. Its orders declined 11% in the reported quarter. Organically, the segment’s sales rose 4% year over year while orders were down 10%.

The Power segment’s revenues were flat year over year to $5,401 million as growth of 8% in Gas Power revenues were offset by 16% decline in Power Portfolio revenues. The segment’s orders declined 30%. On an organic basis, the segment’s sales were up 5% while orders declined 28%.

GE Capital’s revenues in the reported quarter totaled $2,096 million, down 15.3% year over year.

For 2019, the company’s consolidated revenues were $95,214 million, decreasing 1.9% year over year. However, the top line surpassed the Zacks Consensus Estimate of $94.5 billion.

Margin

In the quarter under review, General Electric’s cost of sales declined 7.3% year over year to $19,080 million. It represented 72.7% of the quarter’s revenues versus 77.6% in the year-ago quarter. Selling, general and administrative expenses in the quarter increased 5.5% year over year to $3,829 million. It was 14.6% of the quarter’s revenues versus 13.7% in the year-ago quarter.

The Industrial segment’s adjusted operating profit in the quarter rose 57.8% year over year to $2,767 million while margins grew 410 basis points to 11.3%. On a reported basis, the Industrial segment recorded profit of $3,344 million, up 59.8% year over year. The Power segment recorded profit of $302 million versus $786 million loss in the year-ago quarter, while Renewable Energy’s loss was $197 million against $21 million loss in fourth-quarter 2018. Aviation and Healthcare segments’ profit rose 19.3% and 0.6% year over year, respectively.

The GE Capital segment witnessed profit of $69 million against loss of $86 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter of 2019, General Electric had cash and cash equivalents of $84.9 billion, up from $76 billion recorded at the end of the previous quarter. Borrowings were $90.9 billion versus $93.2 billion at the end of the third quarter.

Adjusted free cash flow for GE Industrial totaled $3,884 million in the fourth quarter, down from $4,644 million in the year-ago quarter.

Restructuring

In June 2018, General Electric communicated plans to transform into a high-tech industrial company — focused on Aviation, Power and Renewable Energy.

In sync with its plans, the company completed the sale of its transportation business to Wabtec Corporation in the first quarter of 2019. Further, General Electric has agreed to divest the BioPharma business to Danaher Corporation. Subject to the receipt of regulatory approvals and fulfillment of customary closing conditions, the divestment is anticipated to be completed in the first quarter of 2020.

Further, General Electric has lost its controlling shareholding in Baker Hughes and hence, has been classified as discontinued operations.

Efforts are on track to reduce exposure to the GE Capital business. Asset disposition has amounted to approximately $12 billion in 2019, including roughly $8 billion completed in the fourth quarter of 2019. Also, it reduced debt by $7 billion in 2019.

Outlook

In the quarters ahead, General Electric is committed toward enhancing its long-term growth opportunities, reducing leverage and strengthening businesses.

The company projects organic revenues in the Industrial segment to grow in a low-single-digit range. The segment’s adjusted margin (on an organic basis) will increase 0-75 basis points.

The company’s adjusted earnings are predicted to be 50-60 cents per share in 2020. Industrial free cash flow is expected to be $2-$4 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -20% due to these changes.

VGM Scores

Currently, GE has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise GE has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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