So, how deep did General Electric stock (NYSE: GE) sink when earnings reports were released on Friday? 6%. Yes, within 16 minutes of trading, volumes had surged past the 30-day volume average as traders mused about the future of GE. Consequently, GE stock was liquidated after earnings reports missed Wall Street expectations by a wide margin.
General Electric (NYSE: GE) Q3 2017 earnings and downgrade of 2017 profitability expectations reminded investors and large shareholders as Trian Partners, of what lies ahead as the new CEO and members of the board take over. Hard numbers show that while Dow market index is up 18% this year mainly buoyed by surges in Caterpillar (NYSE: CAT) and Boeing stocks (NYSE: BA), GE is underperforming and is down 25%.
General Electric’s Q3 profits were $1.8B representing a 10% YoY drop and a huge miss of $3.8B profit predicted by S&P Market Intelligence survey. GE didn’t disappoint on the profit frontier only, earnings per share were dismissive posting $0.29 against $0.49. The only bright side was that slight 14% increase in revenue which improved from $32.56B to $33.47B beating analysts’ expectations.
As much as GE was profitable, earnings always have a heavy stamp on investors and shareholders. Chances of their dividends being slashed looks likely and if does happen, then it would be the first time since 2007-2008. During that time of uncertainty, earnings took a slide but Q3 2017 was actually worse. Looking at GE metrics, dividends are up $0.09 from Q3 2011 dividend per share of $0.15 representing a 60% growth in 6 years.
Even though John Flannery recognized solid performances in other GE departments in Q3 2017, he pointed out GE’s high inventory and management challenges especially in their Power Division were weighing down profitability. He reassured investors of new cost-cutting measures and consequent realigned in unprofitable departments and franchises to spur growth.
“This was a very challenging quarter. While a majority of our businesses had solid earnings performance challenges in the power sector led to lower earnings and higher inventory. We believe that the new leadership team at Power and the cost actions that we are taking will better position the company in 2018 and beyond.” John Flannery, GE CEO
With such blunt talk from the CEO, changes should be expected. QE plans of shedding unprofitable franchise as they restructure should be a sigh of relief. The Power Division, tasked with designing and manufacturing power and water equipment for utility companies, for example, will have new management. Further cost-cutting plans to the tune of $2B- including reducing executive perks and other redundancies are on the cards.
Already, Jeff Bornstein, who was the chief financial officer, has stepped out. According to Jeff, there was a 51% profit drop in this department which was largely blamed on inefficiency and poor execution. Ultimately, this leads to delays in several key projects. Piling more pressure was that remarkable drop in profitability in the Oil and Gas section. As noted, General Electric was actually in loss-making territory posting a $36M loss in Q3 2017. This is contrary to last year’s stellar performance where profitability peaked at $353M
Going forward, Flannery said that earnings are expected to remain suppressed as the company grapples with shrinking cash flow. In his statement, investors will be briefed come November on the way forward. He asserted that GE needs to “redefine its culture” and improve the way the business is run. Trian Partners will be represented in GE board by Ed Gardener and their CEO Nelson Peltz hopes he brings “new mindset”
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