Are General Electric’s Earnings Really That Good?

January 31, 2019 by Paul Ausick

General Electric Co. (NYSE: GE) reported fourth-quarter and full-year 2018 results before markets opened Thursday. For the quarter, the conglomerate reported adjusted earnings per share (EPS)  of $0.17 on revenues of $33.28 billion. In the same period a year ago, GE said it had adjusted EPS of $0.43 on revenues of $31.6 billion. The latest results also compare to the consensus estimates for EPS of $0.22 on revenues of $32.59 billion.

For the full year, GE posted adjusted EPS of $0.65 and revenue of $121.62 billion, compared with year-ago EPS of $1.00 and revenues of $118.24 billion. Analysts had forecast full-year EPS of $0.71 and revenues of $120.71 billion.

The company also announced that it has reached a $1.5 billion settlement with the U.S. Department of Justice related to subprime lending practices for the years 2005 to 2007 at its WMC Mortgage unit. GE last April booked this amount as its possible liability. That the settlement did not cost the company more is good news.

Chair and CEO H. Lawrence Culp Jr. said:

Our strategy is clear: de-leverage our balance sheet and strengthen our businesses, starting with Power. To do this, we are improving execution, customer focus, and how we set priorities across GE. I’m confident in our team, technology, and the global reach of GE’s brand and relationships. We have more work to do, but I’m encouraged by the changes we’re making to strengthen GE and create value for our shareholders, customers, and employees.

The Power segment posted fourth-quarter revenue of $6.76 billion, down 25% year over year. The segment posted a net loss of $872 million. For the year, Power segment revenues dropped 22% and the unit’s net loss totaled $808 million.

The Renewable Energy segment reported quarterly revenue of $3.36 billion, up 28%, but a profit of just $67 million, down 51%. The Oil & Gas segment reported revenue of $6.25 billion, up 8% and adjusted profit of $396 million, up 60%. Baker Hughes, a GE Company (NYSE: BHGE) contributed $96 million in cash to GE’s quarterly profit.

The Aviation segment was GE’s best performer, with revenue of $8.46 billion and profit of $1.72 billion, up 21% and 24%, respectively, year over year. Healthcare revenue rose 2% to $5.4 billion and profit rose by 2% to $1.18 billion.

GE also pointed to several significant deleveraging moves the company made last year:

  • Reduced quarterly dividend, accelerated the sell-down of GE’s stake in BHGE, and increased GE’s retained stake in the planned Wabtec transaction, collectively allowing GE to generate or retain approximately $10 billion of cash.
  • In GE Industrial, signed or completed substantially all of the $20 billion asset disposition program in 2018.
  • In GE Capital, completed $8 billion of asset sales and other actions in the quarter, bringing the total dispositions to $15 billion in 2018; paid down external debt by $21 billion in 2018.

GE offered no guidance for either the first quarter or the full 2019 fiscal year. Analysts have set first-quarter EPS at $0.16 on revenues of $27.9 billion. For the full year, EPS is forecast at $0.84 and revenues at $119.78 billion.

GE still needs to sort out some serious problems with broken blades in its newest electricity-generating turbines. The company has set aside $480 million to pay for repairs and customers’ warranty claims. The deeper problem, of course, is that turbine sales are falling.

The good news for GE is that investors liked what they heard and pushed the stock up by nearly 9% at $9.77 in Thursday’s premarket trading. Shares closed up about 2.3% on Wednesday, at $9.10 in a 52-week range of $6.66 to $16.11. The consensus 12-month price target on the stock is $11.61.

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