Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

General Electric wanted investors to focus on its core industrial business. Be careful what you wish for.

The $293 billion conglomerate announced second-quarter earnings on Friday in its first release since completing the sale of its appliance business and shedding its too-big-to-fail label after inking deals for more than $180 billion of its finance assets.

The headline numbers were actually pretty solid; GE beat analysts' earnings and sales estimates for the period. But there were some soft spots, and that was enough to unsettle investors. Shares of the company dropped more than 2 percent as of midday on Friday, putting GE on track for its biggest post-earnings slump in more than two years. 

How GE Stacked Up
GE's revenue and earnings per share beat estimates for the quarter, but some divisions fell short.
Source: Bloomberg, with assistance from Rachel Layne in Boston

GE's transformation under CEO Jeff Immelt had helped push its shares up 21 percent in the year through Thursday -- almost 10 times the gains for the S&P 500 and more than double the returns of a broader group of industrials. With the stock bumping right up against analysts' share price estimates for the next 12 months, GE needed to execute to perfection in order to justify further gains. That's a hard thing to do, given the high bar the company has set for itself.

Burden of Proof
GE's stock is just a few dollars short of analysts' 12-month price target. It's going to need to give investors something to be excited about to get further share price gains.
Source: Bloomberg

The maker of trains and wind turbines has one of the more aggressive sales goals of its big industrial peers and it's sticking to it, forecasting as much as a 4 percent pickup in 2016 organic revenue. That had already raised a few cautious eyebrows among investors, but GE's latest results give them more reason to be suspect. The company seems to be running into many of the same issues as its peers in this slow-growth economic environment -- peers that aren't as optimistic about 2016.

Orders plunged 16 percent in the second quarter, excluding the effect of currency swings and acquisitions. That's partly because of the timing of the Farnborough air show, a pivotal event for aviation orders that took place in July this year. The 2015 Paris air show occurred in June and contributed to the second quarter. But this comes on the back of a 7 percent organic drop in orders in the first quarter and a 3 percent decline for all of 2015.

Just You Wait
GE is forecasting an ambitious pick-up in its organic sales growth in the latter half of the year
Source: Bloomberg

Revenue in the power, renewable energy and oil and gas divisions was below the average of three analysts' estimates compiled by Bloomberg, while some of GE's energy-related businesses also fell short of their profit projections. Overall, sales for the industrial segments fell by 1 percent on an organic basis in the first half of the year, meaning the company needs a 5 percent surge in the second half to meet its goal.

GE has said all along that it expected the first half of 2016 to be weak, and that sales would surge ahead in the latter part of the year because of some large shipments of turbines at its power division as well as some easier comparisons in oil and gas. But that outlook looks increasingly at odds with what's happening in the industrial world around it.

Take Honeywell, for example. That $87 billion company had to cut its revenue guidance for the year by $300 million as organic sales dropped in the second quarter. Honeywell's estimates for third-quarter earnings per share and revenue also came up a bit short relative to analysts' estimates. CEO Dave Cote is now targeting just 1 percent organic growth for the year in what is seemingly a concession that a pickup in the economic environment may now be more of a 2017 event -- a message that's in line with the vibes given by other industrial companies of late.

GE may yet make its guidance. But there's also no shame in admitting the business environment just isn't that great. If Immelt is going to need to lower expectations, it's better to do it sooner rather than later. It won't be a good look if his big revamp of GE kicks off with a big miss. 

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net