General Electric Co. (GE, Financial) and Baker Hughes, a GE Co. (BHGE, Financial) both opened approximately 3% lower on Oct. 20 as the companies reported weak earnings performance for the three months ending Sept. 30.
GE
GE said third-quarter net earnings declined 5% year over year primarily due to a 13 cents per share impairment charge. While the majority of the business reported solid earnings performance, according to CEO John Flannery, the company still underperformed during a “challenging quarter.” The company reported a 78% decline in industrial cash flow from operating activities (CFOA) due to lower power volumes, which directly contributed to low earnings and high inventory.
GE’s operating margin is near a 10-year low despite outperforming 78% of global industrial companies. Industrial margins contracted 2.40% year over year, implying declining growth potential.
Baker Hughes
GE completed the combination of its oil and gas business with Baker Hughes Inc. to launch Baker Hughes, a GE Company July 3.
Baker Hughes reported revenues of $5.4 billion for the quarter, down 1% from second-quarter revenues. Although the company reported solid orders growth, Baker Hughes reported $122 million in operating losses as costs of goods sold increased from $2.294 billion to $4.355 billion from September 2016-17.
Baker Hughes CEO Lorenzo Simonelli said although the company saw improvements in activity, he expects the macroeconomic environment to remain challenging for the rest of the year due to volatile oil prices.
A declining growth outlook
GE’s profitability ranks a modest 5 out of 10. The company has three severe warning signs, including contracting margin growth and declining revenues. Lower returns on assets, current ratios and gross margins contribute to a poor Piotroski F-score of 4.
Disclosure: The author has no positions in the stocks mentioned.