Why Analysts Expect General Electric’s Margin to Narrow in 2Q17
General Electric’s operating margins in 2Q17
Previously, we looked at analysts’ estimates for General Electric’s (GE) 2Q17 revenue. In this section, we’ll review analysts’ projections for GE’s operating margins. Analysts anticipate General Electric to attain an operating margin of 10.1% in 2Q17, which represents 360-basis-point fall from 2Q16.
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Could operating margins improve?
General Electric reiterated its expectation of an operating margin improvement of 1% at the Electrical Products Group Conference on May 24, 2017. According to a GE report on the meeting, “By 2018, GE expects to cut $2 billion in structural costs, with about 100 basis points of margin expansion and 3-5 percent organic growth per year. To date, GE has kicked off several significant actions to reduce the cost of its operations, and the company already is seeing lower costs from optimizing its newest technologies like the H-turbine.”
The company has also focused on improving supplier productivity in the Industrial segment. The acquisition of AirVault, a cloud-based digital records management company, will most likely improve GE’s aviation asset management and maintenance.
The implementation of GE’s technology expertise into Baker Hughes should create $1.6 billion in cost and growth synergies for Baker Hughes, A GE Company (BHGE) by 2020. For more on the GE-Baker Hughes deal, read Can the BHI–GE Partnership Benefit from Global Growth?
Equipment margins: a hurdle
If General Electric focuses on reducing its service backlog, service revenue should go up, thereby improving its service margin. However, equipment pricing remains under pressure amid weak global economic activities. As a result, equipment margins will remain subdued in the coming quarters.
The breather on that front will come from the higher production of H-type turbines and LEAP aircraft engines. According to a company statement, with the production ramp-up, the H-type turbine’s and LEAP engine’s cost of production per unit is anticipated to fall 10% and 15%, respectively, in 2017.
In the recent past, General Electric has seen robust growth in its Power and Aviation segments. In fact, service revenue from these segments has been rising faster, further strengthening service margins. Therefore, the company’s overall operating margins should be stronger going forward.
GE makes up ~7.6% of the Industrial Select Sector SPDR ETF (XLI). This ETF also has exposure to some of GE’s close peers, such as The 3M Company (MMM) and Honeywell International (HON). In the next part, we’ll discuss GE’s dividend distribution.