General Electric (NYSE:GE) is slated to report its second-quarter earnings on July 17 before the market opens. Going into the report, Wall Street is calling for GE to generate $28.7 billion in revenue, translating to $0.31 per share in earnings. Compared to the previous year, GE's second-quarter revenue and earnings are expected to fall by over 20% before extraordinary items.
Along with the earnings release, General Electric will host an earnings conference call to provide additional clarity about the underlying health of its various businesses. The following three areas will help investors gauge how business is faring at the industrial giant.
1. GE Capital
In April, GE announced a comprehensive plan to significantly reduce the size of its financial services business, GE Capital, over the next two years, and return over $90 billion in capital to shareholders in the form of dividends, stock buybacks, and share exchanges by 2018.
Ultimately, this divesture allows management to better focus on growing its industrial businesses, makes GE less vulnerable to financial shocks, and will rid the company of additional oversight from financial regulators. By 2018, GE wants 90% of its operating earnings to come from industrial activities. The remaining 10% will come from GE Capital, but only in a capacity that supports the growth of its energy, aviation, and healthcare businesses.
In total, GE estimates that it will cost about $23 billion to shed its non-core financial assets related to GE Capital. Of the $23 billion, GE recognized a $14.1 billion non-cash charge against earnings in the first quarter, and now expects to record an additional $4.3 billion non-cash charge in the second quarter. With about $4.6 billion remaining, investors should key into how GE Capital's planned financial services exit is progressing.
2. Industrial cash flow
During the first quarter, General Electric's cash flow declined by 29% year over year to $890 million -- greater than management had anticipated. According to CEO Jeff Immelt, the shortfall was caused by delays in payment collection and supply chain issues related to aviation inventory.
On the conference call, Immelt highlighted that industrial cash flow will be stronger in the second quarter, and should be up "substantially" in the first half of 2015 versus last year.
Considering that industrial cash flow is essential for GE to invest in future growth initiatives, pay dividends, and repurchase shares, it's important for investors to monitor whether the company generates consistent cash flow growth.
3. Oil and gas
Many oil and gas companies have been experiencing headwinds related to slumping oil prices, but General Electric's highly diversified oil and gas segment bucked the trend in the first quarter.
After adjusting for currency fluctuations, GE's first-quarter oil and gas organic revenue growth was unchanged year over year, and margins improved by 50 basis points. For the quarter, oil and gas represented 16% of GE's industrial revenues and accounted for 12% of its industrial profits.
Although GE hasn't been as hard hit as some of its competitors in oil and gas, the market's ongoing uncertainty may bring volatility to the segment's results on a quarter-to-quarter basis. Investors should continue to assess how GE's oil and gas business is performing relative to its peers.
All eyes on the 17th
When General Electric reports earnings on July 17, investors should focus on how the underlying business is performing rather than how investors react to the news. In the earnings release and conference call, look and listen for updates about GE Capital, the health of its industrial cash flow, and how its oil and gas segment is performing. These areas will act as great starting points in determining how GE fared in the second quarter.
Steve Heller has 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.