General Electric Company’s GE shares jumped 6% at a point in pre-market trading, as investors cheered the company’s strong earnings and revenues beats. The company started 2018 on a robust note as it reported first-quarter 2018 adjusted earnings of 16 cents per share, which beat the Zacks Consensus Estimate of 11 cents.

The company’s bottom line benefited from strong performance in Aviation and Healthcare businesses. Also, robust cost controls drove profits.

GAAP earnings from continuing operations for the reported quarter came in at 6 cents a share compared with 5 cents in the year-ago quarter.

Revenues

Total consolidated revenues for the reported quarter rose 7% year over year to $28,660 million and trumped the Zacks Consensus Estimate of $27,884 million. While the Industrial segment revenues improved 9% year over year to $27,395 million, GE Capital revenues declined 19% to $2,173 million. Organic revenues for the Industrial segment fell 4% for the quarter to $23,817 million.

Total orders for the quarter for the Industrial segment increased 10% year over year to $27.4 billion, with significant order improvements from the Renewable Energy segment (up 15%), Aviation unit (up 13%) and Transportation (up 46%). These were partially offset by persistent decline in Power (down 29%).

 

General Electric Company Price, Consensus and EPS Surprise

 

 

Revenues by Segments

Revenues from Lighting inched down 1% to $456 million with lower revenues from the legacy lighting businesses, while Oil & Gas revenues were up 74% year over year to $5,385 million due to improved revenue contribution from Baker Hughes. Revenues from the Aviation segment rose 7% to $7,112 million, while Transportation revenues declined 11% year over year to $872 million on lower locomotive volume.

Power segment revenues were down 9% year over year to $7,222 million with lower demand for turbines, while revenues from the Healthcare segment improved 9% to $4,702 million owing to solid volumes. Revenues from the Renewable Energy segment declined 7% year over year to $1,646 million, thanks to lower Onshore Wind equipment sales. GE Capital segment generated a loss of $1,768 million.

Margins, Balance Sheet and Cash Flow

Driven by stringent cost-cutting and simplification initiatives, GE recorded higher margins in the reported quarter. The company reduced Industrial structural costs by $805 million in the quarter and is on track to exceed its cost reduction target of $2 billion in 2018.

Adjusted Industrial segment operating profit increased 15% year over year to $2,745 million, while margins expanded 60 basis points (bps) year over year. Improvement in profits in Aviation (up 26%), Transportation (up 37%), Renewable Energy (up 10%) and Healthcare (up 11%) was partially offset by a decline in Power (down 38%) and Oil & Gas (down 30%).

GE Power is the largest business segment of the company in terms of corporate revenues. However, the business has been a drag on earnings in the last few quarters as global demand waned with increasing popularity of renewable energy sources, overcapacity, lower utilization and fewer outages. Industry experts opine that the acquisition of Alstom’s assets for $10 billion in 2015 further compounded the problems for General Electric, as it increased operating costs and contracted margins.

Cash used in operating industrial activities for the quarter (excluding deal taxes and pension plan) totaled $1,681 million, up 39% year over year. Cash and marketable securities at year-end 2017 aggregated $69.3 billion compared with $82.7 billion in the year-ago period.

Outlook

GE reiterated its guidance for 2018. The company continues to project operating earnings in the range of $1.00–$1.07, with momentum in Aviation and Healthcare and persistent challenges in the Power segment. The company expects a gradual improvement in earnings with structural changes, simplification and cost-cutting initiatives.

The steady outlook was a source of comfort to investors who have been suffering one of the deepest slumps in GE’s 126-year history. GE also reassured that it’s progressing on its plan to divest more than $20 billion of assets. The company’s CEO John Flannery is now considering all options — including a break up as he seeks to turn around the beleaguered maker of jet engines and power equipment.

GE is not the only industrial giant which is contemplating a disintegration of its conglomerate structure. Per recent reports, United Technologies Corporation UTX is considering a similar move. Recently, German player Siemens AG SIEGY offloaded a part of its Healthineers medical imaging business through an IPO worth $5.2 billion.

Stock to Consider

General Electric carries a Zacks Rank #4 (Sell).

A better-ranked stock in the same space is Federal Signal Corporation FSS, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Federal Signal has trumped estimates in each of the trailing four quarters and generated an average beat of 16.5%.

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