Looking Beyond the Headlines Is Important - the GE Stock Example
To be a stock trading success story you need to start with online stock trading, build up your experience, and move from safer investment options to more growth-oriented but potentially risky ones. But all through that journey you must have an ability to see beyond the headlines.
Right now, General Electric ($GE) appears to be a very attractive stock. Its Q1 earnings surpassed expectations, its full-year guidance has been reiterated, while the stock price has also fallen dramatically. That makes $GE really attractive. So you should grab it with both hands, right? But analysts, such as Lee Samaha of Motley Fool, reckon it's not as simple as that.
Attaining the Bottom End of Guidance Range Will Be Tough
General Electric's adjusted full-year EPS guidance stays in the range of $1 to $1.07. It's FCF (free cash flow) guidance remains in the region of $6 billion to $7 billion. Samaha reckons that while this may seem like good news, there is a lot more for the company to do just to attain its guidance range's bottom end.Samaha also reckons that the earnings were presented in a confusing manner. The power segment was depicted as being somewhat “flat to 2017”. Performance was told to be lesser than what was mentioned at the company's investor meeting in November. However, this does not present the full picture.
The level to which $GE reduced its previous power segment guidance was not mentioned. That comes from another source, JP Morgan's Steve Tusa, who mentioned that the implied guidance reduction from the power segmentis somewhere in the region of $500 million, which translates to an EPS of $0.05. That's a big reduction, though that picture did not emerge from the earnings presentation.
$500 Million Guidance Reduction in Power Segment Is Significant
$GE CEO John Flannery did acknowledge that the full-year EPS would likely move towards the range's lower end. But that doesn't take away the fact that General Electric still has its work cut out in 2018. Now at the earnings presentation, the power segment was depicted “flat”. So how did that translate to a $500 million reduction?
That earnings call guidance was on the basis of results that were restated for 2017, and not as per the earnings estimate at the company's November investment update, which was, according to Samaha's calculation based on the management guidance and the reported 2016 figures, $2.45 billion. According to the restated results, General Electric's profit for the power segment was only $1.95 billion. In that sense, the power segment guidance mentioned at the earnings call actually translates to a guidance reduction of $500 million.
That's a significant amount for $GE to make up. Samaha reckons it can really not be made up from the power segment alone. According to Flannery, the earnings pressure in the power segment can be offset by higher earnings in the healthcare and aviation sectors coupled with reduced corporate costs. But the low and high point difference in the guidance for the healthcare and aviation sectors stands at $30 million and $250 million respectively. That makes it very hard to make up the $500 million even if the company sees both these segments exceeding their guidance high-end.
Pressure on GE's Healthcare and Aviation Segments
Even to reach the management's 2018 guidance low point, the healthcare and aviation sectors will be under intense pressure. It's probably because of that the company's management has failed to upgrade the aviation segment guidance.
The power segment has its challenges too. General Electric's core product here is the heavy-duty gas turbine. While the end market demand for these turbines in 2016 was 48 gigawatts, and 34 gigawatts in 2017, Flannery believes the demand in 2018 and the years after will be somewhere below 30 gigawatts.
The company management has had to acknowledge the weakening of the power market in 2018, resulting in a bleak picture for the future. Analyst opinions matter in situations like this, when the headlines don't tell the entire story. To understand the vagaries of the stock market requires experience, and that comes from online stock trading at reliable online broker dealers such as TradeZero. We help novices as well as experienced traders benefit from our advanced trading platforms. We also offer commission free trading. So get in touch with us at +1 954-944-3885 or email email@example.com.
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