Why Analysts Are Mostly Looking Down on GE After Earnings

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General Electric Co. (NYSE: GE) released earnings on Friday and the results were lackluster. Some would even say that the report was outright disappointing, based on its revenue metrics. 24/7 Wall St. has tracked multiple analyst calls in the wake of GE’s earnings. The overall positive ratings are remaining in place as Buy and Outperform, but the trend seems more like lower analyst price targets and lower earnings expectations.

GE’s guidance for 2017 was in the range of $1.60 to $1.70 EPS. Estimated free cash flow and dispositions are forecast in a range of $16 billion to $20 billion. GE also expects to return dividends totaling approximately $8 billion and buybacks totaling $11 billion to $13 billion in 2017.

Revenues in the oil and gas segment were down 22% year over year in the quarter from $4.36 billion to $3.40 billion. Energy connections revenue fell 29% to $3.33 billion, and renewable energy revenues were up 29% to $2.50 billion. GE also noted that its backlog during the quarter rose 2% year over year to $321 billion. Of that total, $237 billion is services backlog and $84 billion is equipment.

The Thomson Reuters consensus price target was $34.27 before results were announced. As of Monday morning, that consensus analyst price target was listed as $34.13. It may be worth pointing out that a drop on Monday morning had GE shares down 4.4% year to date.

Ahead of GE’s earnings, Goldman Sachs had reiterated its Neutral rating and it had a $30 price target. Here are some of the analyst calls that have been seen on General Electric’s ratings and price targets.

UBS has a Buy rating, but on Monday morning the firm lowered its price target to $35 from $36.

Merrill Lynch reiterated its Buy rating and $37 price target. Its view was that the organic revenue miss was on GE Power unit shipments. Still, its margin improved and it saw inline free cash flow. The outlook of Merrill Lynch’s Andrew Obin remains at the lower end of the street estimates, and he said:

As we expected, GE reiterated its 2017 EPS outlook of $1.60 to $1.70 and organic growth forecast of 3% to 5%, which was provided in mid-December. We think the Street will question the forecast of a strong organic growth acceleration on the back of still sluggish orders and below-expectation fourth quarter revenue results. We remain more comfortable at the low end of the guidance range with EPS of $1.62, below consensus of $1.66.

To highlight GE’s investment rationale, here is what Merrill Lynch had to say:

We forecast GE to post double-digit EPS growth in its Industrial business, which puts it as one of the highest growth large-cap Industrial names. The April 10 announcement of a staged exit of most GECC businesses may translate to more regulatory visibility at GECC, allowing it to upstream more capital to the parent and GE utilizing its industrial balance sheet more efficiently.

GE was maintained as Outperform at Credit Suisse, which lowered its price target to $34 from $35. The firm also lowered earnings estimates slightly. Credit Suisse thought that GE would not perform well over earnings as it looked insufficiently back-end loaded for 2017. While Alstom’s EBIT and synergy generation were bright spots, its sales were shown to be only $13 billion, and it is the $100 billion in other industrial sales that is of more concern. Two points were brought up here:

  • GE’s Industrial profit excluding FX and portfolio changes declined by 9% in Q416, and by 5% for FY16, despite flattish organic sales;
  • and free cash flow declined by 5% in 2016, despite a considerable y-o-y increase in the fourth quarter of 2016.

S&P’s equity team maintained its Buy rating on GE and kept its $36 target price. S&P’s report noted about the disappointing quarter on weaker revenues than expected:

Oil and gas was the primary culprit, and should remain weak. However, power, aviation, healthcare and transportation are likely to be stronger in ’17. We remain positive on GE’s transformation, like the upcoming Baker Hughes deal, and see GE accelerating EPS growth in 2018.

Deutsche Bank is one firm with a price target under the current GE share price. That is a Hold rating and $28 target price, based on applying a 17 P/E ratio to the firm’s 2018 GE Industrial EPS forecast and a 9 P/E ratio on the firm’s 2018 GE Capital EPS forecast. That would be a $31 target on its own, but the $28 target is based on a 10% discount rate.

Shares of General Electric traded down about 1.4% in Friday’s premarket session to $30.79 and its stock closed at $30.53 by the time Friday’s closing bell came. GE shares were trading down another 1.2% at $30.17 on Monday after about 30 minutes of trading. It has a 52-week range of $27.10 to $33.00.

As far as how these analyst reports compare to what the company said with earnings, CEO and Chairman Jeff Immelt said:

We executed on our 2016 goals and continued to drive growth across our businesses through the GE Store while investing in additive manufacturing and digital technology. We delivered $1.49 of earnings per share this year and 1% of organic growth. We reported $32.6 billion of free cash flow and dispositions and returned $30.5 billion to shareowners through dividends and buyback. We will continue to invest in the Industrial Internet to lead in productivity and performance for our customers in 2017.