GE Earnings Preview: Checking in on Turnaround Progress

General Electric Co. reports second-quarter earnings before market open on Friday, July 20. The industrial conglomerate has had a rough past year. Here’s a look at what might be expected from Friday’s report.

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There’s no denying that General Electric (GE) has had a tough go over the past several years amid a long-running restructuring and turnaround effort. The company has been more vocal lately about all the steps it’s taking, as well as the fact that this turnaround is going to take time. So investors might just be hoping for no surprises when GE reports earnings before market open on Friday, July 20. 

At an industry conference on May 23, CEO John Flannery said a couple of things that seemed to unnerve investors and the stock dropped more than 7% the same day. In the weeks after, it dropped to a new 52-week low of $12.61. 

First, Flannery commented that people seem to be wondering what’s taking the company’s turnaround plan so long to execute. He didn’t alleviate those concerns by saying “Being deliberate and then moving when things make sense as opposed to moving just because somebody wants us to, it’s just my style.” 

Second, Flannery was also asked if the company could commit to maintaining its $0.12 quarterly dividend. His response was that it was “ultimately a function of the free cash flow of the company and that’s ultimately a function of our operating performance with the assets and things we do with the portfolio.” 

While honest, the company’s dividend was already cut in half last year and investors might have been hoping for a different response. GE’s current yield was 3.49%, as of July 18. 

The most recent turnaround steps GE has announced were plans to spin-off their healthcare unit as a standalone company and fully separate Baker Hughes (BGHE). Once the healthcare spin-off happens, GE said the new GE Healthcare Board of Directors will establish its own dividend policy, and GE’s Board of Directors indicated that it expects to adjust the GE dividend at the same time. 

Those steps were announced at the end of June. At the same time, GE said its focus going forward would be on its core Aviation, Power and Renewable Energy businesses. 

Earnings and Revenue Estimates

For Q2, GE is expected to report adjusted EPS of $0.18 per share on revenue of $29.31 billion, according to third-party consensus analyst estimates. Revenue is projected to be down 0.8% and EPS down 10 cents compared to last year.  

Analysts have said that they expect the Power business to stabilize after a stretch of declines. Analysts estimate revenue from that division will come in at $7.1 billion, up 1.8% year over year. 

Analysts also said they expect revenue from Aviation to increase 6.1% year over year to $7.2 billion, while Renewable Energy is expected to decline 12.6% to $2.15 billion. 

DOWN AT THE LOWS. GE’s stock has continued to slide in 2018 and is down 23.53% year to date. The stock hit a nine-year low of $12.61 on June 21. The stock rebounded slightly since following GE’s announcement that it would exit its Baker Hughes (BHGE) investment and spin-off its healthcare unit. Chart source: thinkorswim® by TD Ameritrade.   Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Options Trading Activity

Options traders have priced in a 3.5% stock move in either direction around GE’s earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 50th percentile as of this morning. 

In short-term trading at the July 20 expiration, calls have been active at the 14 strike price, while puts have been active at the 13.5 and 14. With the options expiring the same day as GE’s report, most of the recent activity has been right around the money. Volume at the July 27 weekly expiration has been pretty light.

Further out, the 15 strike call has seen heavier trading at both the August 17 monthly expiration and the September 21. The 15 strike call at the September 21 expiration had much higher volume than the rest of the strikes at the same expiration. 41,792 contracts traded at that level during Wednesday’s session, whereas volume across all the other strikes was 2,661 at the most. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Next up in Earnings

Earnings season kicks into high gear next week with major companies across sectors reporting. These are some of the bigger names that are scheduled to release results: 

  • Alphabet (GOOGL, GOOG) reports after market close on Monday, July 23
  • Verizon (VZ) reports before the open Tuesday, July 24, and AT&T (T) reports after the close the same day
  • Boeing (BA), General Motors (GM) and Coca-Cola (KO) report before the open Wednesday, July 25; Ford (F) and Facebook (FB) report after the close that day
  • Amazon (AMZN) and Intel (INTC) both report after market close on Thursday, July 26
  • Oil supermajors Chevron (CVX) and ExxonMobil (XOM) round out the week with reports before the open on Friday, July 27

For a look at what else is going on, check out today’s Market Update if you have time. 

Good Trading,
JJ

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