Industrials

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

General Electric Co. didn't need to go big with its sales guidance...again. 

The maker of industrial software, jet engines and wind turbines held its 2017 outlook event on Wednesday and forecast revenue gains of 3 percent to 5 percent next year. excluding the impact of acquisitions and currency swings.

It's a tall order: For that to happen, GE's downtrodden oil and gas business needs to stabilize somewhat and the sluggish global growth that's plagued industrial companies this year needs to stop being so sluggish. It's possible that GE can deliver, but CEO Jeff Immelt also runs a risk of over-promising and under-delivering. (RBC analyst Deane Dray, for one, estimates 2017 organic growth will work out to more like 3.5 percent, below the midpoint of GE's guidance.)

Too Enthusiastic?
GE is again coming out with an organic growth forecast that's more aggressive than other industrial companies
Source: Bloomberg, company filings
Data reflects the midpoint of organic/core revenue guidance.

We've been here before: This time last year, Immelt also came out swinging on organic growth, projecting expansion of 2 percent to 4 percent in one of the more ambitious calls among his peers. The $278 billion conglomerate had to walk that back in the third quarter, admitting sales might be flat year over year. The fumbled messaging muddled GE's coming-out party as a more-focused industrial company and is one reason why the stock is up less than a dollar from where it was this time in 2015. And it might not even be higher at all, were it not for the market's post-election rally.

It seems there were few lessons learned from that experience. GE is again leading the pack on organic growth forecasts and to what end? There shouldn't be any shame in playing things more conservatively. Consider that Danaher Corp., a company that's barely an industrial anymore after taking a hard turn into the much faster-growing life sciences industry, is calling for organic growth of as much as 4 percent next year. No offense, GE, but you're not Danaher.

One is Not Like the Other
Danaher is primarily a life-sciences company following the spin-off of its industrial technologies business this year
Source: Bloomberg

United Technologies Corp., which also held its outlook call on Wednesday, projected core revenue would grow by 2 percent to 4 percent in 2017. The company's new jet engine was already a boon to sales this year and that should continue in an even bigger way 2017, despite the delivery glitches that have plagued the rollout. While CEO Greg Hayes echoed Immelt's optimism for the U.S. economy, he was less sanguine about global growth, calling for a 2.8 percent expansion in GDP, a modest improvement from this year's 2.4 percent.

Investors are likely to give GE a pass on its exuberant growth forecast for now because the company was able to show it doesn't necessarily need that big of a boost to reach its goal of $2 in earnings per share by 2018. The declines in its oil and gas business have set GE back about 10 cents to 15 cents, but it's making up for that with share buybacks, the planned combination of its energy assets with Baker Hughes Inc. and a new $1 billion cost-cutting plan. Should its sales numbers turn out less rosy, GE has $10 billion in unallocated capital that it can put toward buybacks and M&A to help it get across the finish line on the EPS goal. Shares of the industrial giant were little changed in early trading on Thursday.  

Full Circle
GE's stock hasn't seen a significant gain over the past year
Source: Bloomberg

Immelt said the organic growth forecast was achievable in part because it's in keeping with the company's historical average. But the past isn't what investors care about and their patience may wane if GE doesn't deliver the goods (and the stock price) to back up that enthusiastic view.

Activist investor Trian Fund Management disclosed a stake in GE last year and thus far has been largely supportive of the company's strategy. But the firm's base case called for a valuation of about $43 a share by the end of 2017, not including dividends. GE currently trades for about $31.50 and analysts are targeting a price of about $33 on average over the next 12 months. GE will need a message investors can have faith in to bridge that gap.

No one wants 2016 to be renewed for another season.

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