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Should We Expect General Electric to Deliver in 1Q17?

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Part 3
Should We Expect General Electric to Deliver in 1Q17? PART 3 OF 6

Will GE Prove Analysts Wrong in Terms of Operating Margins?

Analysts’ estimated operating margin

Earlier, we discussed General Electric’s (GE) estimated 1Q17 revenue. In this article, we’ll look at analysts’ expectations for GE’s 1Q17 operating margin. Analysts expect GE to achieve operating margin of 10.2% in 1Q17. Although this represents a fall of 360 basis points on a year-over-year basis, analysts expect the company’s operating margin to expand over the next four quarters.

Will GE Prove Analysts Wrong in Terms of Operating Margins?

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Margin improvement in 2017

In its 4Q16 conference call, General Electric guided for margin expansions of 1% in 2017 and 2018. The company expects the synergies in its Alstom and Baker Hughes (BHI) deals to curtail its overall operating costs in 2017. About half of its expected 1% margin expansion in 2017 is expected to come through the leveling off spending on its H and LEAP engines and its new wind turbines.

The company expects to attain the remaining 50 basis points of margin expansion through its implementation of digitization and its integration learning. GE is aiming for a $1.7 billion cost reduction throughout 2017 and 2018. It expects the new IT (information technology) structure to run IT horizontally across the company to save $450.0 million. The consulting agreement with PricewaterhouseCoopers is also projected to cut $100.0 million in costs.

Plus, GE’s plan to exit the single-digit operating margin business will most likely pave the way for more clean operating margin going forward, resulting in the company’s decision to sell the consumer lighting business.

The big deterrent to GE’s operating margin will come from the oil and gas business. Baker Hughes has a significantly lower operating margin than GE. Though GE plans to apply its digital technologies in the oil and gas space to drive down costs, it’s not going to happen anytime soon.

ETF investment

GE makes up ~10.0% of the Industrial Select Sector SPDR ETF (XLI). This ETF also has exposure to some of GE’s close competitors, including 3M Company (MMM), Honeywell International (HON), and some GE customers such as Union Pacific (UNP). Next, we’ll look at General Electric’s additive manufacturing plans.

Free cash flow generation has been an Achilles’ heel for General Electric. But can it increase its dividends? Keep reading.

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