GE's Performance Under Scrutiny
October 19 2016 - 11:56AM
Dow Jones News
By Ted Mann
It's back to the future for General Electric Co. this
quarter.
The industrial giant, which reports earnings Friday, is
contending with a raft of Wall Street downgrades, a slipping stock
price, and growing questions of whether the conglomerate will meet
its own profit goal for the year.
GE Chief Executive Jeff Immelt, who has delivered disappointing
results to Wall Street before, this time has a new investor to
please: Nelson Peltz, whose Trian Fund Management LP disclosed a
$2.5 billion stake in the company about a year ago.
The investment was as friendly as activist approaches get, with
Trian endorsing the leadership of Mr. Immelt and applauding his
move to pull GE away from the financial businesses that once
generated half its profits. But Trian's investment was predicated
on the thesis that GE could boost profits beyond Mr. Immelt's own
public targets, improve margins and add some $20 billion in new
debt to its balance sheet to buy back GE shares.
So far this year, GE's performance has disappointed. It reported
weak revenue in the first half of this year and Mr. Immelt has
promised investors that sales of its gas turbines will pick up in
the second half of the year, allowing the company to hit its
targets. The company has yet to take on new debt, though share
repurchases are on pace to exceed its goal for the year.
Now, the outlook for U.S. industrial companies is dimming.
Honeywell International Inc., which like GE produces aerospace
equipment and jet engines; and Dover Corp., which makes equipment
for the energy, fluid-control and food-service industries, both
issued profit warnings for the third quarter. Overall, analysts
expect GE to report earnings of 30 cents a share for the quarter,
on revenue of $29.64 billion, according to FactSet.
"GE is now a clear low-expectations stock," Morgan Stanley
analyst Nigel Coe wrote in a recent report when he lowered his
third-quarter profit forecast and target price for the stock.
That is a comedown from last year when Mr. Immelt won plaudits
from analysts and investors for selling most of GE's finance
operation, which had dragged on its performance after the financial
crisis. The stock rose 24% in 2015, trading above $30 for the first
time since 2008.
A year after news of Trian's investment put a charge into GE's
shares, sending them up more than 5% in one day, that progress has
stalled out. Shares have slumped below $30, and are down 5.6% for
the year.
Investors who were buoyed by Trian's appearance on the scene and
GE's decision to exit finance have been frustrated by the company's
failure to use its balance sheet to either make a major acquisition
or a more substantial buyback, said Barclays analyst Scott
Davis.
"They literally haven't done anything to help themselves," Mr.
Davis said.
Mr. Immelt and his team are trying to show investors the
company's renewed focus on industrial business lines will increase
profits. The company aims to boost GE's per-share earnings to $2 a
share in 2018, an increase from the $1.61 the company reported in
2015. Trian, meanwhile, believes GE could get the measure to $2.20
in that time.
Cowen warned in August that it was "unrealistic" for GE would
pull off a late-year surge in profits because of the cost of
ramping up production on GE's newest commercial jet engines and
sagging markets for oil and gas equipment.
"Activist or not, at the end of the day you've got to deliver
the numbers," said Gautam Khanna, an analyst at Cowen & Co.
Analysts from J.P. Morgan Chase & Co. advised clients to
sell GE shares in May, questioning whether the structural changes
were enough to offset doubts the company would meet Mr. Immelt's
earnings goal in 2018.
Meanwhile, the company has bought back $13.7 billion in shares
through the first half of the year, ahead of the pace for its $18
billion target for the year. And it has made a some small
acquisitions.
In July, Mr. Immelt said the company would be "disciplined" in
deciding whether to buy back shares -- Trian's preferred strategy
-- or pursue more acquisitions.
As for borrowing, as Trian has also urged, Mr. Immelt hedged.
Any leverage GE adds to the balance sheet "is going to be paced by
the opportunities to put that capital to work, if we in fact do it,
and the returns that we can generate for shareholders," Mr. Immelt
said.
Write to Ted Mann at ted.mann@wsj.com
(END) Dow Jones Newswires
October 19, 2016 11:41 ET (15:41 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
General Electric (NYSE:GE)
Historical Stock Chart
From Feb 2024 to Mar 2024
General Electric (NYSE:GE)
Historical Stock Chart
From Mar 2023 to Mar 2024