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General Electric and Analysts’ 1Q17 Operating Margin Estimates

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Apr. 28 2017, Updated 9:36 a.m. ET

General Electric’s 1Q17 operating margins

In our General Electric (GE) pre-earnings series, we asked, “Will GE prove analysts wrong in terms of operating margins?” Now, after 1Q17, we see that General Electric proved analysts wrong about those operating margins. For GE as a whole, Reuter-surveyed analysts forecast operating margins slightly above 10.0%. The company reported operating margins of 12.9%.

Even though General Electric was able to surpass analysts’ estimates, its 1Q17 operating margin fell 90 basis points, from 13.8% in 1Q16.

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Is GE on the margin improvement track?

In its 4Q16 conference call, General Electric guided for margin expansion of 1.0% in 2017 and 2018. The company incurred an $0.08 per share charge due to industrial restructuring and other corporate level items. These charges of $1.0 billion included Alstom’s European power-related synergy investments of $300.0 million. The Baker Hughes (BHI) deal, water, and its Industrial Solutions divestiture charges amounted to $200.0 million.

The Alstom and Baker Hughes synergies reduced General Electric’s overall operating costs in 2017. The company’s plan to exit the single-digit operating margin business will also clean up the path for broader operating margins in the coming quarters.

The slightly favorable and changing-toward-positive oil and gas environment should boost GE’s operating margin going forward. For fiscal 2017, the company anticipates $0.25 in gains from Water and Industrial Solutions disposal to compensate $0.25 of restructuring charges. However, in 2Q17, GE expects $0.07 of restructuring in return for no offsetting gains.

Investing in ETFs

Investors interested in exposure to large-cap companies can opt for the SPDR S&P 500 ETF (SPY). General Electric forms 1.3% of SPY. The other big industrial names in SPY are Berkshire Hathaway (BRK-B), 3M (MMM), and Boeing (BA).

Cash flows from operations have become GE’s Achilles’s heel. We’ll look at that in the next part of this series.

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