Will Lower Industrial Segment Profit Hurt GE's Q4 Earnings?

Industrial goods manufacturer General Electric Company (NYSE:GE) is scheduled to report fourth-quarter 2017 results before the opening bell on Jan 24. The company is likely to report lower industrial segment profit in the quarter owing to higher operating costs and charges from the legacy insurance business.

Whether this will hurt the bottom line of the company remains to be seen.

Higher Expenses

GE recently revealed that it expects to record $6.2 billion in the fourth quarter as charges from the legacy insurance business. Estimates reveal that GE will require capital contributions to the tune of $15 billion over seven years due to an increase in the life expectancy of the aging population. These long-term care policies usually date back to decades and have grossly underestimated projected healthcare costs and life spans, hurting the exchequer of companies like GE.

This has severely impaired CEO John Flannery’s plans to script a turnaround in the company, with 2018 being termed as a “reset year”. Flannery had earlier disclosed his plans to focus on just three core segments — power, aviation and health-care equipment — and gradually exit all other businesses to plug the downtrend. The company is now seriously contemplating to spin off its operations to maximize shareholder returns.

Amid this backdrop, the Zacks Consensus Estimate for the Industrial segment profit in the to-be-reported quarter is currently pegged at $4,954 million compared with year-ago profit of approximately $5,842 million. Almost all the sub-segments within the segment are likely to record leaner profits on a year-over-year basis except Healthcare. Total Industrial segment’s revenues are likely to be marginally up to $31,570 million from $31,236 million in the year-earlier quarter, although total corporate revenues are expected to be down to $32,693 million from $33,088 million.

Other Key Factors

GE Power, one of the largest business segments of the company in terms of corporate revenues, has been a drag on earnings in the last few quarters as global demand waned with increasing popularity of renewable energy sources, overcapacity, lower utilization and fewer outages. Industry experts opine that the acquisition of Alstom’s assets for $10 billion in 2015 compounded the problems for GE, as it increased the employee count by approximately 65,000 with the addition of several field offices and manufacturing sites across the world. It seemed that GE had erred in its judgment about market demand and gambled on an industry that was on a decline.

The company intends to lay off 12,000 employees across the globe in its GE Power business, as part of its corporate objective to lower operating costs and improve profitability. In addition, GE aims to reduce overhead costs by $2 billion in 2018, majority of which is likely to come from the beleaguered power segment that sells electrical generation equipment. The company further intends to sell assets worth $20 billion to improve its liquidity. At the same time, the company has halved its quarterly dividend to 12 cents per share — the first dividend cut since 2009 at the peak of the recession. For 2018, the dividend allocation will be $4.2 billion, down from more than 100% of free cash flow to 60-70% while the dividend yield will be trimmed from 4.7% to 2.3%.

Despite all these efforts, GE’s fourth-quarter earnings are likely to be hit by high overall expenses. Our proven model does not conclusively show that GE is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00% with both pegged at 28 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

General Electric Company Price and EPS Surprise

General Electric Company Price and EPS Surprise | General Electric Company Quote

Zacks Rank: GE has a Zacks Rank #5 (Strong Sell).

Note that we caution against stocks with a Zacks Rank #4 (Sell) or 5 going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Apple Inc. (NASDAQ:AAPL) has an Earnings ESP of +1.82% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

AmerisourceBergen Corporation (NYSE:ABC) has an Earnings ESP of +1.50% and a Zacks Rank #2.

American Financial Group, Inc. (NYSE:AFG) has an Earnings ESP of +1.21% and a Zacks Rank #2.

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