Nobody is expecting an earth-shattering surprise when General Electric (NYSE:GE) releases its quarterly earnings Friday. After a year of carnage in its share price that paved the way for a major business overhaul, all investors want is to see some light at the end of tunnel.
On average, analysts expect that company earned 18 cents a share in the second quarter, down from 28 cents per share in the same quarter a year ago. Revenue is forecast at $29.14 billion.
These low expectations are the outcome of a tumultuous year for this industrial conglomerate. Its stock lost more than half of its value, the dividend was slashed in half and the company was booted from the Dow Jones Industrial Average.
But amid this doom and gloom, a picture is emerging about what GE is going to be once Chief Executive Officer John Flannery is done with his turnaround plan. In the company’s strategic review announced late in June, Flannery presented a plan to simplify GE by spinning off its health-care unit, selling down its stake in the Baker Hughes energy business and pulling back further from finance arm GE Capital.
The results will be a tech-focused aviation, power and renewable energy company with a much leaner and simpler structure. Those are “three highly complementary businesses poised for future growth,” Flannery said in a statement.
Can Major Changes Resuscitate The Stock?
But the biggest question investors face is whether this plan will bring GE’s beaten-down stock back to life? Despite all the optimism, we remain skeptical. Investors’ focus will shift to the execution risk of this massive undertaking, with no chance of a V-shaped recovery in its stock price.
Another uncertainty that will keep the company’s share price depressed is its renewed focus on the power business. Unless we see clear evidence of a demand recovery for GE’s power products, its cash flow position will remain weak.
The power unit is going to be the largest revenue generator after GE completes its transformation. Amid weak demand for its steam and gas turbines, orders and prices for fossil fuel equipment have plunged, forcing GE to lay off 12,000 workers at the end of last year.
Investors should expect another drop in sales from the power business when results arrive before the bell Friday. Overall, the Street is expecting a 36% decline in adjusted earnings per share compared to the same period a year ago.
The Bottom Line
Trading around $14, GE shares have been bouncing around levels last seen in 2009.
There is no easy way to value GE, which is in the process of divesting its major businesses and struggling to raise cash to avoid a debt rating cut. As we have written in our earlier articles, it’s better for risk-averse investors to stay on the sidelines.
Flannery is focusing on all the right businesses, where future growth is. But interested investors will need to be patient.