GE Sales Missed Estimates -- So What?
Don't get distracted by General Electric's revenue miss. That's not the main attraction here.
GE fell short of quarterly sales estimates when it reported results on Friday, largely because of the steep 16 percent decline in its business that provides equipment and services to the oil and gas sector. The misstep was enough to send the stock down as much as 3 percent on a day when markets were rallying. The stock pared its decline, but still had the second-worst performance among members of the Dow Jones Industrial Average.
The slump in GE's oil and gas business isn't exactly a surprise. While oil rallied on Friday, prices are still hovering near the lowest level since 2003. Some parts of GE's oil and gas business are hit harder by declining prices than others. The downstream operations -- which supply refiners and petrochemical makers -- can actually benefit from lower raw-material costs. But there's no escaping the pain of crude's precipitous plunge.
That said, revenue for the entire industrial segment declined just 1 percent on an organic basis (meaning excluding the impact of acquisitions and currency swings.) That's actually pretty good. On an annual basis, organic industrial revenue climbed 3 percent. That's within the range of what GE forecast for itself at its outlook meeting back in December 2014 -- well before the world knew just how bad the smackdown in oil prices was going to get.
And as we've noted, industrial companies aren't exactly in a growth period right now. These days, you're lucky if you're growing as fast as the U.S. gross domestic product, which currently is on track to expand 2.4 percent this year.
GE is not a revenue story. It's missed analysts' sales estimates in seven of the last eight quarters. More often than not, its shares actually rose when that happened as investors focused on other things. What's going to distinguish the good industrials from the so-so industrials in this tough environment is operating excellence. It's worth noting that activist investor Nelson Peltz isn't calling for GE to do a better job beating analysts' revenue estimates; he's looking for wider profit margins.
On that front, GE delivered. Despite the revenue miss, earnings per share (adjusted for unusual items) beat analysts' estimates in a sign that cost cuts are working. Industrial margins, a measure closely watched by GE followers as a sign of the company's strength, climbed 0.8 percentage point to 18.3 percent in the fourth quarter. The company hasn't even really started in on all the fat that can be cut at Alstom, either, which could prove a further boon to margins.
While operating margins for the oil and gas business were down versus a year ago, they were up relative to the third quarter. And GE added to its cost-cutting plan for that division. It's now planning to take out $800 million in expenses from the oil and gas business, on top of $600 million in cuts implemented in 2015.
Investors may have just been jumpy at any sign of more bad news in a market that's been plagued by it so far this year. And with GE trading near its highest price since 2008, it's understandable that some may be wary. But all in all, the earnings report delivered just as much good news as bad news.
To contact the author of this story:
Brooke Sutherland in New York at email@example.com
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