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General Electric: Inside the Drop in 3Q17 Transportation Revenues


Oct. 27 2017, Updated 6:34 a.m. ET

GE’s Transportation revenues in 3Q17

In this part, we’ll examine General Electric’s (GE) Transportation segment. In 3Q17, GE’s Transportation revenues fell 14% to ~$1.1 billion from ~$1.3 billion in 3Q16. This segment has the lowest share (3.6%) of GE’s total Industrial revenues of $30.0, with the exception of the Lighting segment.

From 3Q17, GE’s combined Energy Connections business included in the earlier Energy Connections and Lighting segment with the Power segment. Due to this combination, the company reports the Lighting and Current businesses as a separate segment—Lighting.

The Transportation segment’s operating income fell 11% to $276.0 million in 3Q17. However, the vertical’s operating margin expanded 1% to 25.7% in that quarter.

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GE Transportation segment’s orders in 3Q17

At the end of 3Q17, General Electric had parked 4,000 locomotive units. The orders for new locomotives rose 54% to ~$1.1 billion. This trend resulted from strong services volume in mining and locomotive transactional services.

GE Transportation’s services backlog was impacted by a $3.1 billion service contract termination notice from GE’s key North American client in 3Q17. This contract includes 800 locomotives, which are mostly in service.

Management outlook

The North American overall carloads (UNP) were up 3.8% in 3Q17, fueled by 6.6% growth in intermodal units. However, the pace of growth has been much slower compared with earlier years.

General Electric expects challenges in the North American locomotive market (TRN) in 2017 and 2018. The company foresees 73% lower locomotive shipments in North America, although the international shipments could rise 46% at the end of 2017.

GE signed a $575.0 million agreement with Egyptian National Railways for 100 locomotives and services. The company is also in talks with the government of India to supply 1,000 locomotives beginning in 4Q17.

ETF discussion

Boeing (BA) leads the holdings of the Industrial Select Sector SPDR ETF (XLI), comprising ~6.5% of XLI’s portfolio. Investors who prefer indirect exposure to industrial stocks can consider investing in XLI. Industrial giants General Electric (GE), 3M Company (MMM), and Honeywell International (HON) comprise ~6.1%, ~6.1%, and ~5.0%, respectively, of XLI’s holdings.

Next, we’ll analyze GE’s operating margins in 3Q17.


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