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Will GE Pull a Surprise for its Investors in Q1 Earnings?


Industrial goods manufacturer General Electric Company GE is scheduled to report first-quarter 2017 results before the opening bell on Apr 21. In the last reported quarter, the company’s operating earnings matched the Zacks Consensus Estimate. Over the trailing four quarters, General Electric reported an average positive earnings surprise of 3.5%, beating estimates twice and matching them in two. Let’s see how things are shaping up for this announcement.

Key Factors in the Quarter

During the quarter, General Electric completed the last major asset sale transaction of GE Capital exit plan in order to retrace its engineering roots. The company sold GE Money Bank – its French consumer finance business – and its operations in the French Overseas Territories to an affiliate of Cerberus Capital Management L.P., for an undisclosed amount. With the restructuring initiatives, General Electric expects operating earnings from the industrial businesses to comprise over 90% of its total operating earnings by 2018, up from 58% in 2014.

At the same time, the company is selectively acquiring assets to boost its Industrial Internet vision and improve the top line. General Electric is also focusing on the commercialization of the Predix software to augment its revenues. Predix is designed to add intelligence to the Internet of Things applications. It helps companies to connect their machines, data and people and run industrial-scale analytics. The combination of machine connectivity with a data lifecycle management platform powered by engineering simulation will help diverse firms design their products for the Industrial Internet in the best way possible. Consequently, it is likely to generate incremental revenues for the company.

Further, the merger of General Electric’s Oil & Gas business with Baker Hughes Incorporated is likely to improve segment sales with a complementary portfolio of operating assets and integrated offerings. However, Baker Hughes has a significantly lower operating margin than General Electric, which can act as a big deterrent to its plans to improve overall operating earnings.

Despite prudent steps to limit its financial exposure by divesting GE Capital assets, General Electric is still susceptible to various market risks. The company’s objectives of simplification and productivity improvement pose operational execution risks as well. For a company as large as General Electric, the additional revenues needed for growth are quite large, posing a challenge in developing businesses on such a vast scale.

Earnings Whispers

Our proven model does not conclusively show that General Electric is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -5.88%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

General Electric Company Price and EPS Surprise

General Electric Company Price and EPS Surprise | General Electric Company Quote

Zacks Rank: General Electric’s Zacks Rank #3 when combined with negative ESP makes an earnings prediction uncertain.

Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Panera Bread Company PNRA has an Earnings ESP of +2.76% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pinnacle Foods Inc. PF, with an Earnings ESP of +2.17% and a Zacks Rank #2.

Treehouse Foods, Inc. THS, with an Earnings ESP of +4.62% and a Zacks Rank #2.

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