Did General Electric Surpass Analysts’ Margin Estimates in 2Q17?
2Q17 operating margin
In this article, we’ll review General Electric’s (GE) 2Q17 operating margin. GE posted a 12% fall in its 2Q17 revenue. On the other hand, the company’s operating expenses fell 5%.
In terms of its adjusted operating margin, GE reported a 10-basis-point improvement in its 2Q17 operating margin to 13.8%. The company surpassed Reuters-surveyed analysts’ operating margin estimate of 10.1% for the quarter.
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Margin improvement in sight?
General Electric is targeting a 1% expansion in its operating margin in 2017 and 2018. The company is expecting the sale of its water business in 3Q17 to partially aid this margin improvement. Also, in 2H17, the company is aiming for a 120-basis-point improvement in its operating margin.
Minimizing the huge fixed costs associated with restructured businesses poses another big challenge for GE. The company’s industrial margins, which were hovering between 17% and 19% a few quarters ago, have contracted to the 12%–14% range. The oil and gas market, which showed signs of revival in 2017, has cooled down again.
Jeff Bornstein, GE’s chief financial officer, said on GE’s 2Q17 conference call, “The LEAP engine continues to perform to spec, with 62 aircraft flying today. . .As LEAP shipments accelerate in the second half, we expect the margins to be pressured and still expect total year margin rate to be roughly flat with 2016.”
General Electric may not able to shed certain fixed costs associated with weak businesses. Plus, the sheer size and complexity of GE’s businesses have complicated its task of managing its costs in times of falling revenue.
If you’re interested in exposure to large-cap companies, you can consider investing in the SPDR S&P 500 ETF (SPY). General Electric forms 1% of SPY. Other big industrial names in SPY include Berkshire Hathaway (BRK-B), 3M Company (MMM), and Boeing (BA).
In the next article, we’ll consider GE’s 2Q17 operating cash flows.