General Electric: Why Its Operating Margins Slid in 3Q17
GE’s 3Q17 operating margins
In this article, we’ll assess the 3Q17 operating margins of General Electric (GE). On a consolidated revenue basis, GE reported a 14% rise in its 3Q17 revenues. At the same time, the company’s operating expenses rose 19.7%.
On a YoY (year-over-year) basis, GE’s operating margin contracted 2.4% in 3Q17 to 10.9% compared with 13.3%.
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GE’s Industrial reported operating margins of 11.8% in 3Q17, down 2.2% basis points from 14% in 3Q16. The toll on the company’s margins resulted from significant erosion in the Power and Oil & Gas business’s operating margin.
What the CEO said
During the company’s 3Q17 earnings call, General Electric’s CEO, John Flannery, noted, “As a start, we’re already implementing a plan to drive substantially in excess of $2 billion of cost out in 2018 compared to our previous target of $1 billion.
“We will have a much smaller, more focused corporate; and we’re rightsizing our business to face market realities. And we’ll be mindful of the need to balance aggressive focus on costs with critical investments in long-term growth initiatives.”
General Electric aims for a 1% expansion in operating margins in 2017 and 2018. Minimizing the huge fixed costs associated with restructured businesses poses another challenge for GE.
GE’s industrial margins, which had been in the 17%–19% range a few quarters ago, have dropped to the 12%–14% range. The slump in the Power and Oil & Gas market could impact the operating margins going ahead.
Investors interested in indirect exposure to large-cap stocks can consider investing in the SPDR S&P 500 ETF (SPY). General Electric comprises 0.9% of SPY’s holdings. Berkshire Hathaway (BRK-B) comprises ~1.7% of SPY’s holdings, followed by 3M (MMM) with 0.63% and Boeing (BA) with 0.67% of its portfolio.
In the next article, we’ll dive into GE’s operating cash flows in 3Q17.