General Electric shows stench of oil is hard to escape

Bloomberg

In his final days atop General Electric Co., Jeffrey Immelt still can’t throw off oil’s stink. In his farewell earnings report, the chief executive officer ended his 16-year tenure by telling Wall Street that GE’s earnings are likely to be disappointing the rest of this year. The culprit: sputtering energy markets.
It was the latest setback for a CEO who never could win over investors and came under pressure this year from activist shareholder Trian Fund Management. GE plunged the most in almost two years and is poised for the seventh straight decline on a day it reported earnings.
Oil has become a source of headaches for GE investors as well as a symbol of Immelt’s efforts to find a path forward for a signature US company. The departing CEO built up the crude business by spending billions on acquisitions before prices tumbled and customer demand for oilfield equipment dried up. He closed a deal this month to merge those assets with Baker Hughes, but GE is hardly exiting the industry: It retained a majority stake in the combined entity.
GE’s reliance on oil — along with power generation, renewable energy and aviation — became more pronounced under Immelt as he sold off finance and consumer operations. It’s now the job of John Flannery, a GE veteran set to succeed Immelt on Aug. 1, to decide the future composition of the company.
“Because of what we’ve learned about the volatility over the past two years, the question is: Is that the right thing for the portfolio?” said Deane Dray, an analyst at RBC Capital Markets. Since the new Baker Hughes company is publicly traded, “GE has an opportunity to structure a staged exit. That allows them to exit oil, should they choose to.”
With the crude and power markets weighing on GE’s results, adjusted earnings are likely to be near the bottom of the company’s previous forecast of $1.60 to $1.70 a share, GE said. Analysts anticipate $1.62 a share, based on the average of estimates compiled by Bloomberg.
GE didn’t mention next year’s profit target of $2 a share, though Flannery said he would give a comprehensive business update in November. He plans to focus on “reframing our look at 2018 and beyond,” he said on a conference call with analysts.
GE has struggled this year with cash-flow concerns and soft demand in some markets. The Boston-based manufacturer recently agreed to deepen cost cuts amid pressure from Trian, the activist investor co-founded by Nelson Peltz. The shares tumbled 3.2 percent to $25.84 at 2:57 p.m. in New York after dropping as much as 5.4 percent for the biggest intraday decline since August 2015. The drop extends GE’s slide this year to 18 percent, making the company the biggest loser in 2017 on the Dow Jones Industrial Average, which has advanced 9.1 percent.

EARNINGS FALL
Second-quarter adjusted earnings fell to 28 cents a share, GE said. That exceeded the 25 cent average of analysts’ estimates compiled by Bloomberg. Sales declined 12 percent to $29.6 billion, compared with $29.2 billion expected by analysts.
Revenue rose 5 percent in the power division as profit slid 10 percent. Sales fell 3 percent in GE Oil & Gas, while profit in the unit plunged 52 percent. “Power feels more challenging than where we came into the year. Oil and gas definitely is more challenging,” Chief Financial Officer Jeff Bornstein said in an interview. The crude-focused division will perform better in the second half, “but it’s not going to be the kind of recovery the business thought coming into the year.”