Industrials

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

(Corrected )

General Electric Co.'s earnings report wasn't horrible, but it had its disappointments -- and investors zeroed right in on them. 

We're Waiting...
GE's middling sales performance did little to inspire investors after the company already had to roll back its ambitious organic growth guidance
Source: Bloomberg

Shares of the $271 billion maker of ultrasound machines and artificial-lift equipment fell as much as 2.2 percent on Friday as fourth-quarter sales came in lower than what analysts had anticipated. For context, that's the worst intraday drop since Oct. 21, the day GE reported underwhelming third-quarter revenue and had to cut its overly ambitious organic growth guidance. There's a pattern emerging here, and it's not pretty.

Whoops
GE has missed analysts' revenue estimates in 10 out of the past 13 quarters
Source: Bloomberg

GE's weak fourth-quarter revenue draws a red line under the company's struggles lately to accurately gauge its growth abilities. Excluding the impact of the Alstom acquisition and currency effects, revenue declined 1 percent in the fourth quarter as the second-half surge GE had been promising failed to materialize. That meant organic growth for the year on that basis was essentially flat, just barely meeting GE's lowered guidance. That rightly raises even more questions about the company's forecast for as much as 5 percent organic growth in 2017.

Dialing Down
GE had to decrease its revenue outlook throughout the year. Organic growth ended up being flat for 2016, excluding the impact of the Alstom acquisition.
Source: Bloomberg
Data reflects the midpoint of the guidance range.

That said, the numbers weren't all bad and there were even some positive takeaways. Orders at GE's core industrial business were down 3 percent on an organic basis in the quarter, but when you add in the impact of the Alstom acquisition, which GE has now owned for a full year, they were up 2 percent. As Steven Winoker of Sanford C. Bernstein notes, that's only the second time in the past six quarters that organic orders were positive. In oil and gas particularly, orders were flat year over year on a nominal basis, which is a big improvement relative to last quarter when they were down 21 percent.

Earnings per share roughly matched analysts' estimates (albeit thanks to a higher-than-expected contribution from what remains of GE Capital as well as tax benefits). Meanwhile, GE's industrial-segment operating margin rose 110 basis points to 18.7 percent. The company's valuation has arguably been held back by its sub-par free-cash-flow generation and GE showed improvements on that front as well. Industrial cash flows from operating activities excluding deal taxes and pension funding amounted to $11.6 billion for the year, pretty close to GE's projected range of about $12 billion.

The flight from GE is curious because the stock is something of a bargain among industrials,  at least relative to its projected earnings. While the company stands to benefit from tax reform and plans for infrastructure stimulus, its gains haven't kept pace with the broader post-election rally. That indicates there was perhaps already some skepticism baked in and also leaves the stock some room to rise should the potential benefits of Donald Trump's administration actually come to fruition.

But all of that got lost in light of the weak revenue numbers, and GE has itself to blame for that in part. Amid the downturn in commodity prices and the so-called industrial recession, investors were more concerned about what companies could do to cut costs and improve their profitability. That, and the opportunity for a more efficient capital structure, was what activist investor Nelson Peltz focused on when he built up a stake in GE in 2015. GE made itself more of a revenue story with its ambitious forecasts.

The pressure is on, more than ever, to start following through.

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

(A previous version of this story misstated the cash flow figures from industrial operations in the fifth paragraph.)

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