General Electric (GE, Financial) announced its 2015 profit outlook on Tuesday incorporating the effect of the “sluggish” oil and gas sector. The crash in crude oil prices have taken a toll on GE’s earnings expectation going forward. In view of this, the company has provided a conservative full guidance that came in quite below analyst expectations. Here’s a brief look at General Electric’s road ahead.
A look at the numbers
The company expects its earnings per share for 2015 to range between $1.70 to $1.80 in contrast to analyst expectation of $1.79 a share. In an investor presentation, the company said that the largest revenue and earnings contributor, the industrial segment, is estimated to make for $1.10-$1.20 a share, while GE Capital is predicted to contribute $0.60 a share. GE is lowering its focus in the finance segment and is working towards pushing up the industrial growth to reduce reliance on the former.
LEAP engine (left), and GEnx (right), Picture from GE Aviation
Growth of the industrial segment is expected to get a boost from the aviation, power, water, and energy management business of the company. This should help bolster General Electric industrial unit profit to jump 10% in 2015. General Electric said that it could see organic industry growth between 2% to 5%. However, the oil and gas business revenue is expected to be flat or decline by as much as 5% in the year. The volatility in oil prices and issues in the Russian economy are some of the challenges that the company is facing. But is it something that investors need to take stock about?
The Oil and Gas segment is going to be a drag
The Oil and Gas unit makes for a quarter of General Electric’s revenue from the industrial segment, which is a sizable portion. Quite obviously, sluggishness performance of this division has a bearing on the results of the industrial segment. Consequently, this draws investor concern. Though low oil prices have helped several industries including boosting auto sales, it is hurting the shares of General Electric that have tumbled 5% in the past three months. Some analysts believe that industrial investors should be cautiously investing in companies, such as General Electric, which have significant exposure to the oil space.
Subsea Trees, Manifolds, and Connection Systems, GE Oil & Gas
However, considering General Electric’s has other divisions that report strong segmental revenue and margins. Though Oil and Gas may be struggling, there are four industrial GE segments that have consistently reported margins north of 15% for in the past three years, namely Aviation, Transportation, Healthcare, and Power and Water. Of these four segments, Power and Gas, Aviation and Healthcare are the prime earnings contributor, while Transportation makes for a smaller chunk of the total income. Also, the prospects of these segments, particularly Aviation is extremely bright as the aerospace industry’s booming with record level backlog. Increasing Airbus and Boeing backlog means more business for GE Aviation.
In a nutshell
The company CEO Jeff Immelt says that GE may be trimming costs at the Oil & Gas unit, but the other industrial segments are functioning very well. He also points out that the next year would portray GE’s commitment to reduce dependence on the company’s finance segment and increase concentration on the industrial segment, which the investors consider has more upside potential with less risk. The company expects to successfully expand industrial segment’s contribution to more than two-third of its earnings. The dip in oil prices will undoubtedly deprive the company of the growth it could have otherwise received from the Oil & Gas. GE would now have to depend on gas turbines, aircraft engine orders, medical, and locomotive. Also, the company’s decision to acquire the energy assets of French company Alstom is a big win for the company that should help it generate revenue and earnings over the long term.
Though one of the important segments of General Electric is witnessing challenges doesn’t mean that the company’s fundamentals have shaken. The other segments will more than compensate for the lull in oil. Therefore, General Electric remains a strong pick in the long run.
