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Why General Electric Might Not Meet Analyst Estimates in 3Q17

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Part 3
Why General Electric Might Not Meet Analyst Estimates in 3Q17 PART 3 OF 6

Will General Electric Deliver on Operating Margins in 3Q17?

GE’s estimated 3Q17 operating margins

Earlier in this series, we took stock of analysts’ estimates for General Electric’s (GE) 3Q17 revenues. Here, we’ll review analysts’ forecasts for GE’s operating margins. Analysts polled by Thomson Reuters foresee the company attaining an operating margin of 15% in the third quarter of 2017. On a year-over-year basis, they anticipate the company will grow its margin by 170 basis points.

On a full-year basis, analysts expect GE to report 1.6% growth in its operating margin to 13.3% in 2017. In the last year, the company reported an 11.7% operating margin.

Will General Electric Deliver on Operating Margins in 3Q17?

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Margin improvement actions

General Electric aims to boost its operating margin by 1% in 2018. Plus, the company is also hopeful about a $2.0 billion structural cost cut and a 3% to 5% year-over-year organic revenue growth. GE’s several cost curtailment initiatives mainly include optimizing the production costs of its latest technologies, like the H-turbine.

Other actions cover improving productivity at the suppliers’ end in its Industrial vertical. In early 2017, General Electric acquired AirVault, a cloud-based digital record management firm. This acquisition is expected to mean better asset management in GE’s Aviation segment along with maintenance optimization.

Equipment margins

The equipment margin seems to be an issue for General Electric. New product launches in recent years, such as the LEAP (Leading Edge Aviation Propulsion) aircraft (BA) engine, have resulted in a lower equipment margin. But the production rise going forward should pull down the per-engine cost. This effect, in turn, should boost the equipment margin. With the global economy moving at a snail’s pace, equipment pricing remains under pressure. The service backlog reduction should be a priority, leading to a rise in service revenue.

Normally, GE posts higher margins in the second half of the year compared with the first half, based on the trends in recent years. On the 2Q17 earnings call, the company noted, “In the second half, we are targeting 120 basis points of improvement to generate 100 basis points for the year. This kind of second-half expansion is typical for GE. We see sustained revenue growth and structural cost-out helping us to achieve this goal. In all, we expect to hit the EBIT target we have discussed in the past.”

ETF discussion

General Electric forms ~6.4% of the Industrial Select Sector SPDR ETF (XLI). This ETF also invests in other industrial majors, such as Honeywell International (HON), 3M (MMM), and Boeing (BA).

GE made a lot of changes in its upper management. The next part of this series discusses the possible reasons.

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