Now that the dust has settled on General Electric Company's (NYSE:GE) strategic review, and investors are clear on the details of the turnaround plan, it's time to look ahead to the industrial giant's next set of earnings. The second-quarter earnings report is likely to be an eventful one, so here's what you should look for:

A sign on a road saying what's next?

GE earnings are rarely short of surprises. Image source: Getty Images.

1. Earnings and cash flow guidance

Don't be surprised if GE lowers full-year 2018 headline guidance. At least that's what shareholders should think after comparing the analyst consensus estimate of $0.94 in EPS with GE's official guidance for $1 to $1.07. Moreover, on the first-quarter earnings call, CEO John Flannery repeated what CFO Jamie Miller told investors in February: Management sees GE's EPS likely trending toward the low end of its guidance. A presage to cutting official guidance? 

It's hard to know if GE will cut guidance, but what we do know is that power segment guidance has been cut by an implied $500 million, or around $0.05 in EPS. We also know that Flannery and Miller have kept the guidance range intact with the notion that a combination of strong earnings in healthcare and aviation, along with costs cuts, would help offset the reduction in the power outlook.

However, a look at the segment guidance (albeit rough estimates) from Flannery at the Electrical Products Group (EPG) conference in May suggests that aviation and healthcare won't beat previous expectations enough to fully offset the reduction in power segment guidance.

2. GE Aviation and the great LEAP forward

The aviation segment margin needs to be watched very closely because there could be some pressure here. To understand why, let's go back to the first quarter, when GE reported a 26% jump in aviation segment profit and significant margin expansion.

Clearly, it was a good result, with management stating that profit was "driven by higher price on commercial engines and aftermarket materials, as well as product cost productivity."

That's the good news, but margin growth was "partly offset by negative mix from higher LEAP shipments." In other words, shipping more LEAP jet engines actually reduces the overall margin. This is because engine manufacturers make their money from aftermarket and services rather than from the equipment itself.

This fact is important because GE shipped 70 LEAP engines fewer than it had expected going into the quarter. In other words, margin got an artificial boost, but GE still expects to ship 1,100 to 1,200 LEAP engines in 2018, meaning that GE will ramp LEAP production in the coming quarters. Watch the impact on margin.

Aviation Segment

Q1 2018 

Q1 2017

Revenue 

$7.12 billion

$6.67 billion

Segment profit 

$1.6 billion

$1.2 billion

Margin

22.5%

19.1%

LEAP engine shipments (units)

186

77

Data source: General Electric Company presentations.

For reference, GE expects around $6.21 billion in segment profit for GE Aviation in 2018.

3. The power outlook

It's no secret that the power segment has suffered deteriorating end-market conditions due to the increased use of renewable energy for electricity production. GE's core power products are gas turbines, from which it generates highly profitable services revenue. After severely overestimating the strength of the gas turbine market, GE has had to dramatically reduce its profit outlook for power on a continual basis in the last year or so. 

According to management, end-market equipment demand will remain weak until at least 2020. So GE's best bet is to restructure power services in order to get power segment margin back into double digits (power margin was 5.6% in 2017). In this context, any discussion on progress in power services margin or cash collection should be closely followed. Miller has suggested that the second half could see some stabilization for the segment, and any update on this view would be welcome.

4. Cost-cutting

Flannery is making impressive progress with GE's underlying aims. For example, GE took $800 million out of structural cost in the first quarter, with $2 billion in cost cuts planned for 2018 on the whole. And he recently announced plans to cut corporate costs by some $500 million by 2020.

Investors should look out for further progress on cost-cutting in 2018, particularly in the power segment.

Looking ahead to the earnings report

GE is in an unusual position from an investment perspective. Based on analyst consensus, power industry trends, possible negative margin impact from increased LEAP production, and the segment outlook at the EPG conference, it wouldn't be surprising to see GE cut its full-year 2018 earnings and cash flow guidance.

On the other hand, if Flannery can convince investors that GE is improving power segment margin (or even if he says power equipment end markets are stabilizing), then investors are likely to conclude that the company is on the right track.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.