Ahead of the Tape: GE's Stock Upswing Needs More Power -- WSJ

By Charley Grant 

Investors have applauded the corporate makeover at General Electric Co. Their optimism will be put to the test Friday when the industrial bellwether reports fourth-quarter results.

Analysts surveyed by FactSet expect GE to report revenue of $33.9 billion and adjusted earnings per share of 46 cents. A year ago, GE reported fourth-quarter sales of $33.9 billion and adjusted earnings of 52 cents a share.

GE has been divesting its vast GE Capital business to focus on a pure industrial portfolio since April 2015. That decision has been a major success. The Federal Reserve no longer designates GE as a "systemically important financial institution" with the attendant restrictions. Investors have sent the stock 25% higher since GE announced its transformation, in part because industrial companies command higher market valuations than financial ones.

The stock has rallied despite GE's revenue falling short of estimates in four of the past six quarters. Investors have been willing to overlook the misses, in part because they have been easy to explain: Thanks to a lengthy bear market, the oil-and-gas business has been a prime culprit for the shortfalls.

In the third quarter, revenue in the oil-and-gas business fell 25% from a year earlier. On a companywide basis, revenue growth was flat through the third quarter from a year earlier after excluding acquisitions, dispositions and foreign currency movements. But sales would have grown 4% without oil and gas.

To its credit, GE has turned the slowdown into an investing opportunity. It agreed this fall to combine its oil-and-gas segment with Baker Hughes into a new publicly traded entity. GE will control the majority of the combined company once the deal closes. Investors should be well positioned to benefit whenever the slump finally comes to an end.

But for the short term, oil and gas remain a drag. Analysts expect revenue of $3.6 billion in the quarter, down 18% from a year ago. Other worries include plodding economic growth and a persistently strong dollar.

The good news: While the business makeover has triggered a valuation boost, the company isn't too richly priced. Its debt-adjusted market value is about 11 times this year's projected earnings before interest, taxes, depreciation and amortization, according to analysts at Barclays. GE's peer group trades at about 12 times that measure.

While Friday's results may not give GE's rally a second wind, shareholders would do well to stick around for a while anyway.

(END) Dow Jones Newswires

January 20, 2017 02:48 ET (07:48 GMT)

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