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Earnings Preview: Industrial Conglomerate GE Reports Tomorrow Morning

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July 20, 2017
General Electric Turbine Rotor
iStock.com/photosoup

General Electric (GE) reports second-quarter earnings before market open tomorrow. It’ll also be CEO Jeffrey Immelt’s last earnings call before stepping down and passing the reigns to John Flannery, who is currently the head of GE’s healthcare division.

After 16 years as CEO, the company announced in June that Immelt would step down effective August 1. The stock initially spiked on the news, but resumed its downtrend shortly after. That decision comes as the company continues to work refocusing on its core industrial operations.  On the company’s earnings call, analysts will likely be looking for additional details about the future direction of the company under Flannery’s leadership and what kind of picture Immelt will paint on his last call as CEO.

Some analysts have said that they expect the company to continue focusing on revitalizing its industrial lines of business, and exiting others as it has been doing in recent years, which started in 2015 when the company announced its plans to create a simpler GE. Part of that plan was exiting most of its GE Capital operations, which due to its size had become classified as a Systematically Important Financial Institution by the United States Financial Stability Oversight Council.

In addition to the plans announced in 2015 to create a simpler GE, the company has used mergers and acquisitions to help consolidate certain business segments. The merger of its Oil & Gas business with Baker Hughes was recently completed, and the new company started trading under the ticker BHGE, which is majority-owned by GE. Analysts will likely be looking for additional information about the merger and oil-and-gas equipment sales, which has been a challenge for the business amid historically low oil and gas prices.

Another area of focus among analysts is usually the company’s backlog, which was $324.3 billion in the last quarter, and when delivery of those products might occur and become revenues for the company. As the company has transitioned its focus back to industrial operations, it’s backlog and orders have consistently grown faster than revenues.

That backlog encompasses a wide range of industrial business with focuses on energy, healthcare, aviation, transportation, to name a few. Because of that global scope, consider listening to the company’s conference calls to learn more about the state of different industries across the world.  

General Electric YTD stock performance charted on thinkorswim platform.

FIGURE 1: A TOUGH STRETCH.

GE stock has hit a tough stretch since the start of the year and is down almost 15% year-to-date compared to the S&P 500’s (SPX) 9.57% increase over the same period. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

General Electric Earnings and Trading Activity

For the second quarter, GE is expected to report earnings of $0.25 per share, down from $0.51 per share in Q2 2016, on revenue of $29.12 billion according to third-party consensus analyst estimates. The company hasn’t missed earnings estimates in the past two years, but revenues have been inconsistent in meeting analyst estimates. In the past six quarters, the stock has declined on the day that it released its earnings results.

The stock started July just above $27, and after bouncing off a low of $25.85 on July 10, it’s been slowly getting back to that level. Options traders have priced in just over a 2.5% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term options trading leading up to the earnings release at the July 21 monthly expiration, calls and puts have been active at the 27 strike price, right at the money. The implied volatility sits at the 64th percentile. 

Looking Ahead

Next week, Alphabet (GOOG, GOOGL) reports on Monday, kicking off a tech heavy week of earnings that includes Facebook (FB), Twitter (TWTR), Amazon (AMZN), and more. In addition to tech, major companies across sectors report and it could be a volatile week when they open their books.   

Good Trading,
JJ
@TDAJJKinahan

NC
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