What to Expect From General Electric Company's Second-Quarter Earnings Call?

Strong fundamentals in key end markets and strategic planning to drive GE’s Q2 earnings…

Jul 17, 2014 at 12:35PM

The American conglomerate, General Electric (NYSE:GE), is ready to report its second-quarter results on Friday, July 18. The company doesn't come out with forecasts, but analysts expect GE to post earnings of $0.39 per share on an average, which is 8.3% higher than the prior year period's $0.36 per share. The growth expectations lag the forecast of 12.5% earnings increase for S&P 500 index for the second quarter of 2014. Sales are estimated to be around $36.3 billion, 3.4% higher than a year ago. 

There's a lot going on with the company -- expansion of the industrial business, the recent Alstom deal, and the approaching spin-off of GE Capital's North American retail finance business. Analysts will have a bag full of questions. Here's what we look forward to hearing.

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GE is helping fuel the future with new technologies that reach oil and gas reserves beneath the sea floor and deep underground, Source: General Electric.

Spotlight on Industrial businesses
GE's business can be primarily categorized into the industrial segment spread across seven sub-segments, which accounted for 70% of the company's 2013 sales, and GE Capital, which accounted for the remainder. The company is focused on growing its industrial businesses and that's where the spotlight is likely to be in the quarter.

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Break up of total segment revenues for 2013, Source: GE Annual Report (link opens a PDF).

Management has set two key targets for the industrial business -- to grow operating margins to 17% in 2016, from 15.7% in 2013, and to derive 70% of its total earnings from the segment in 2017, up from 55% in 2013. It will be interesting to observe how the company's progressing on these targets and listen to any updates that management may have. GE ended the first quarter with a strong backlog of $245 billion, and this could support earnings growth through the year. Last year's top performing industrial segments were aviation, oil and gas, transportation, and appliances and lighting, with each boosting earnings by more than 10%.

The aviation industry witnessed robust growth during 2013 and the International Air Transport Association expects 2014 to be even stronger on the back of an improving global economy. Recovery in commercial aviation is pushing up demand for GE's offerings. The company is already making some pretty big moves to establish its dominance in the space. Among other things, GE is working on 3-D printing (additive manufacturing) and believes it will significantly add to its competitive advantage. According to a recent Reuters report, the conglomerate is expecting orders worth $30 billion from the Farnborough Airshow.

Oil and gas could be another bright spot. The U.S. Energy Information Administration recently released its Annual Energy Outlook 2014 that states that the domestic production of crude oil is increasing sharply. AEO2014 predicts natural gas production to increase by 56% between 2012 and 2040. So, it goes without saying that GE seems to be moving toward even better days.

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Source: AEO2014 Early Release Overview.

More color on Alstom deal
GE has just won the bid to acquire Alstom's (NASDAQOTH:AOMFF) power business -- Alstom was GE's closest competitor in the European power segment and the acquisition will give GE a big boost. But there are still some unanswered questions. Ceding to the demands of the French government, GE's revised deal calls for the creation of three joint ventures with Alstom for the grid; global nuclear and French steam; and renewable businesses. Governance issues could make synergies of $1.2 billion targeted by the American conglomerate more difficult. Alstom's margins are also just half of that of GE, and it remains to be seen how the latter plans to bridge that.

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Source: Bloomberg.

In the Q&A session, analysts could ask management to add more color on the prospects and synergies that will evolve. Investors can expect some updates there. But the acquisition will take about a year's time to complete, and according to Morningstar analyst Daniel Holland, "[T]his deal isn't moving the needle in 2014."

Update on GE Capital
GE plans to spin off its North American Retail Finance business and make it a separate publicly traded company under the name Synchrony Financial. So, we can expect some news on this front. The company wants to downsize the segment to reduce dependence on it. While this step will also mean that GE's top line will lose the support of GE Capital, management is determined to offset this through better performance of the industrial segment. However, these changes will take some time to happen and the quarter should not see any negative impact.

GE Capital's numbers could be affected by the $225 million retail bank settlement ordered by the Consumer Financial Protection Bureau. The company needs to compensate consumers who were affected by the unfair and discriminatory credit card practices of the company. Out of the total settlement amount, $169 million will be given to those consumers who were not allowed to receive debt relief because of their national origin.  

Foolish bottom line
The American conglomerate is going through a transition and has a solid plan -- moving away from the volatility associated with GE Capital and reaching new heights in its well diversified industrial businesses. Improving fundamentals in the key aviation and oil and gas segments could drive performance of the industrial business. And despite the challenges, the Alstom deal could be a big win for the company.

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ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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