Industrial goods manufacturer General Electric Company GE is scheduled to report fourth-quarter 2017 results before the opening bell on Jan 24. The company’s Aviation segment is likely to report lower profit in the quarter owing to challenging market conditions.
Whether this would hurt the bottom line of the company remains to be seen.
Solid 3Q Performance
In third-quarter 2017, GE Aviation recorded revenues of $6,816 million, up 8% year over year driven by strong growth in global passengers and air freight volume. Orders in the quarter improved 12% to $6.9 billion led by equipment orders (up 8%). The military equipment orders were up 10% year over year. Service orders grew 13% with commercial services up 11% on spare parts growth of 21%. Military services were up 56% driven by orders for advanced combat engine and advanced helicopter programs.
Operating profit of $1,680 million was up 12% primarily driven by volume, structural cost productivity and value gap, partially offset by margin pressure from higher LEAP shipments. Operating margin expanded 90 basis points to 24.6%.
Accounting for 20.4% of total revenues in third-quarter 2017, Aviation forms an integral part of GE as CEO John Flannery intends to focus on just three core segments — Power, Aviation and Healthcare. He aims to gradually exit all other businesses to plug the downtrend in its shares. Incidentally, GE was the worst performer of the Dow Jones Industrial Average in 2017, tanking 44.8% in the year.
The Zacks Consensus Estimate for Aviation revenues in fourth-quarter 2017 is currently pegged at $7,203 million compared with $7,187 million reported in the year-ago quarter. Operating profit for the segment is expected to be $1,592 million, down from $1,749 million in the prior year as margins are expected to be under pressure from higher LEAP shipments.
Overall 4Q Expectations
The Zacks Consensus Estimate for the Industrial segment profit in the to-be-reported quarter is currently pegged at $4,954 million compared with year-ago profit of approximately $5,842 million. Almost all the sub-segments within the Industrial segment are likely to record leaner profits on a year-over-year basis except Healthcare. Total Industrial segment’s revenues are likely to be marginally up to $31,570 million from $31,236 million in the year-earlier quarter, although total corporate revenues are expected to be down to $32,693 million from $33,088 million.
The company is likely to report lower industrial segment profit in the quarter owing to higher operating costs and $6.2 billion charges from the legacy insurance business. GE’s fourth-quarter earnings are likely to be hit by high overall expenses with the Zacks Consensus Estimate being pegged at 28 cents. (Read more: Will Lower Industrial Segment Profit Hurt GE's Q4 Earnings?)
Flannery has termed 2018 as a “reset year” and is seriously contemplating to spin off its operations to maximize shareholder returns. In addition, GE aims to reduce overhead costs by $2 billion in 2018, majority of which is likely to come from the power segment that sells electrical generation equipment. The company further intends to sell assets worth $20 billion to improve its liquidity. Also, the company halved its quarterly dividend to 12 cents per share — the first dividend cut since 2009 at the peak of the recession.
Amid such drastic portfolio restructuring initiatives, management has decided to continue its thrust for the Aviation segment, which remains one of the three core segments for the company.
Other stocks from the industry that are likely to report their fourth-quarter earnings soon include 3M Company MMM, Honeywell International Inc. HON and United Technologies Corporation UTX.
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