Why GE Analysts and Investors May Be Set Up for an Earnings Surprise

This Friday morning will mark the third-quarter earnings report for General Electric Co. (NYSE: GE). While GE has had great promise in 2016, the reality is that GE has also faced a lot of headwinds too. Analysts and investors alike have cooled their jets on some of the expectations for the third quarter. Some have even cooled expectations for all of 2016 and for 2017.

The first thing to consider here is that GE shares are now down close to 5% so far in 2016. The shares are actually down over 10% over the past 90 days as the stock has pulled back from the highs.

24/7 Wall St. wanted to show by how much some of the estimates have come down for GE. We also wanted to address the “why” for a reasoning. We would also remind readers that this much conviction for a muted result sets up the stage for GE to potentially surprise if the news is anything other than bad.

GE shares were up 22 cents at $29.20 on Wednesday afternoon. GE’s latest consensus analyst price target is now $32.47, offering implied upside of 11.2%, before considering the 3.1% dividend yield.

What stands out here is that the consensus price target was on the rise for much of the earlier part of 2016. That has reversed, and the mean target is down $1.10 from a month ago and down $1.24 from just 60 days ago.

The median target, which is not used for the real consensus analyst targets, has slid even more of late. That means that multiple analysts have been dragging down some of their upside price targets, even if the lower “sell” and “underperform” ratings have just maintained their target prices. In short, the mean target might show more of what investors should be considering here: more muted upside. The median price target is currently $32.00. That is down from a median target price of $34.00 that was static over the months of July through September.

GE is also one of the fresh nine companies that have disappointed against analyst calls for 2016. In our own 2016 bullish and bearish case for GE, we were looking for 4.95% upside in 2016. It had passed that earlier this year, but now it is negative.

So, what’s driving the negativity and potentiality for a surprise?

One key issue is that GE expanded in the oil and gas services and equipment just in time for oil prices to crash. We have seen very muted expectations ahead from GE’s Oil & Gas efforts, but we cannot forget that oil has recovered handily and OPEC still acts like it will stick with production cuts.

First might be a most recent disappointing guidance from Honeywell. Note that Honeywell did not mean its guidance was bad, but the market voted its money that way. Another issue is that GE made a 3D printing acquisition, and this sector remains full of hype.

The airlines industry has been riddled with slower expectations in 2016. Some of this may be the global weakness, but there have also been flight groundings. All of this acts to mute demand for GE’s jet engines.

A summer research report showed that GE might do better under a Trump presidency, but we have recently seen that GE might now be fine under either Clinton or Trump. As a reminder, GE recently made another acquisition in wind, and GE is active in wind and other alternative and green efforts.

Now we need to consider the recent performance of the earnings themselves. GE’s earnings report from July did not exactly offer any wow factors. The conglomerate’s second-quarter report was $0.51 in earnings per share (EPS) on $33.5 billion in revenue. The Thomson Reuters consensus estimates for that quarter were $0.46 in EPS on revenue of $31.76 billion. In the same period of 2015, GE posted EPS of $0.31 and $29.32 billion in revenue. Still, the guidance and internals were different, and GE shares were trading at $32.59 (without adjusting for dividends) at that time.