I feel the pain of General Electric (GE 1.47%) shareholders right now (because I am one). The industrial conglomerate has seen its stock price drop by more than 60% over the last five years, even as the S&P 500 has chalked up a nearly 50% gain. 

GE's Q2 report was definitely a mixed bag, but that's at least a step up from the terrible earnings reports it was churning out in 2018. So the market's reaction -- shares are down 11.4% since the announcement -- seems unusually harsh. Here's what investors are missing from GE's earnings report. 

A man works on an aviation turbine

General Electric's top division, aviation, suffered in Q2. Image source: Getty Images.

A powerhouse division was left sputtering

The stock market -- and the post-earnings coverage -- seemed to focus heavily on the weaker-than-expected results from the company's healthiest segment, aviation. It's not hard to see why. The troubled power division's ongoing underperformance is behind many of the company's woes, and renewable energy has also been a dud lately. That's left high-margin aviation to pick up the slack as one of the rare bright spots in GE's portfolio.

But those bright spots were noticeably dimmer in Q2. In aviation, orders were down 10% compared to Q2 2018. Profits also slipped by 6% year over year as profit margin fell by 200 basis points to 17.6%. Orders, profits, and margins were even down -- albeit by smaller amounts -- when comparing the first six months of the year to the first six months of 2018. Weakness in aviation orders contributed to overall orders for the company falling by 4% from the prior year's Q2 to $28.7 billion.

The ongoing grounding of the Boeing 737 MAX jet -- for which GE's aviation segment exclusively manufactures the engines -- is very much in the news, and there are legitimate concerns that a prolonged production halt could cause existing customers to cancel their orders, which would have a serious impact on aviation. 

However, there are several positive signs that the market seemed to overlook. 

All in the timing

GE's Q1 earnings report was flat-out bad, but it wasn't as bad as analysts were predicting. At the time, CEO Larry Culp warned investors not to read too much into that, citing orders that were unexpectedly booked in Q1 that would otherwise have come in Q2. So it's no surprise that Q2's orders were down -- some of those were already booked in Q1. 

Also worth noting: GE's aviation division also secured a record $55 billion in orders at the Paris Air Show, which occurred during the second quarter. While you could argue that this is cause for concern -- a record number of Paris Air Show orders ought to result in an increase in segment orders, not a decline -- it goes to show that there are still a lot of customers who are buying what GE's aviation segment is selling, even with the 737 MAX's grounding. 

And that doesn't even address the best news of all.

Things are looking up

Culp, wary of his predecessors' tendencies to overpromise and underdeliver, has been very focused on managing investor expectations. His astonishing refusal to take a victory lap for better-than-expected performance in Q1 and his near-constant reminders that 2019 is a "reset year" for the company are just two examples of his tendency to play the realist rather than the cheerleader.

So when Culp actually increased the company's 2019 guidance as part of the Q2 earnings release, that was a huge signal that perhaps the turnaround is going better than expected. After all, the executive knows about the order and margin declines in the aviation unit, he's aware of the 737 MAX's issues, and he's certainly familiar with the company's ongoing cash flow problems. The fact that he knows all this and still thinks GE is going to do better in 2019 speaks volumes. 

How much better? Culp predicts that organic revenue growth will improve into the mid-single-digits, up from "low-to-mid single digits." He has increased the midpoint of projected annual earnings per share from $0.55 to $0.60. He also sees adjusted industrial free cash flow possibly coming in positive for the year, in a range of negative $1 billion to positive $1 billion, up from negative $2 billion to $0. 

As his prior statements show, Culp isn't likely to raise the company's guidance unless he's nearly certain he can deliver. Investors should feel confident putting greater weight on Culp's guidance than on fears of an aviation slowdown. 

Not out of the woods yet

Just because GE upped its outlook doesn't mean the stock is necessarily a buy. In fact, mid-single-digit organic revenue growth and adjusted industrial free cash flow that may or may not be positive in 2019 is still a pretty dismal prognosis. It underscores that GE and its investors are in for a long, hard slog over the coming months and years. I'm not convinced new investors should be signing up for that right now. 

But one thing's for sure: A double-digit share price drop seems excessive given the company's actual results and its improved outlook.