GE Sales Soften as Industrial Shift Hits Global Headwinds

  • CEO Immelt points to `challenging oil and gas market'
  • Earnings exceed analysts' estimates as GE Capital sales rise

Inside GE's Earnings Numbers

General Electric Co. reported sales declines in oil and transportation as its transformation around industrial manufacturing ran into a sluggish global economy.

First-quarter organic revenue fell 1 percent in the industrial businesses as orders decreased 7 percent on the same basis, GE said Friday in a statement. Organic operating profit, excluding the effects of acquisitions, was flat at $2.9 billion in the manufacturing units.

“We are in the midst of a challenging oil and gas market. However, we are seeing sustained strength in aviation and power markets,” Chief Executive Officer Jeffrey Immelt said in a conference call with analysts.

Navigating the economic headwinds is critical for GE as Immelt tilts the company away from finance and toward industries such as energy and aviation. GE’s reshaping accelerated during the quarter with deals to sell the home-appliances unit and lending operations in the U.S. and India.

Revenue in the industrial divisions and GE Capital operations that the company is retaining were $27.6 billion. Analysts had expected $27.7 billion. Adjusted profit was $1.9 billion, or 21 cents a share, compared with the 19-cent average of analysts’ estimates compiled by Bloomberg.

Finance Strength

While the results topped expectations, a disproportionate share of the earnings came from finance operations, disguising slight weaknesses in the results from the industrial units, said Nicholas Heymann, an analyst at William Blair & Co.

“You would hope the incremental upside comes off the industrial side rather than the finance side,” he said. “This is not the easiest quarter to get people excited about.”

GE Capital sales rose 1 percent. The company has reached deals to unload more than $160 billion of lending assets since announcing a plan in April 2015 to shed the bulk of GE Capital.

The shares fell 0.7 percent to $30.76 at the close in New York. The stock has slipped 1.3 percent this year, compared with a 2.3 percent gain for the Standard & Poor’s 500 Index.

Oil Drop

Sales dropped 18 percent in the oil and gas unit and 25 percent in the transportation division. GE Power, which is working to integrate the recently acquired energy operations of Alstom SA, boosted revenue 13 percent.

GE said operating profit in the oil and gas unit would fall as much as 30 percent this year.

“It was important that we be pragmatic around our expectations for what the business was going to do,” Chief Financial Officer Jeff Bornstein said in an interview. “This is going to be deeper and tougher than we really expected it to be.”

Depressed valuations in the industry downturn may create opportunities to acquire companies or assets, Bornstein said.

“If we could do something smart in the oil and gas space, we’d like to do something smart in the oil and gas space,” he said.

Digital Orders

GE revealed plans in January to move its headquarters to Boston after more than 40 years in Fairfield, Connecticut. The relocation, slated for later this year, is intended to improve GE’s ability to recruit software engineers as it builds a digital division in concert with the industrial business. Orders in the new digital unit rose 29 percent to $1.2 billion, GE said.

“This is the first time we’ve seen digital orders called out in a quarterly presentation, and is illustrative of the growing importance of digital for GE going forward,” Steven Winoker, an analyst at Sanford C. Bernstein & Co., said in a note.

With the overhaul from finance toward industrial mostly complete, the company submitted an application last month to U.S. regulators asking to drop its designation as a too-big-to-fail financial firm. Immelt said the filing “addressed all of the concerns” that originally led to the company becoming a systemically important financial institution.

Operating earnings will be $1.45 to $1.55 a share this year, GE said, reaffirming an earlier forecast. Organic revenue is forecast to rise as much as 4 percent.

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