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Why General Electric’s Operating Margin Fell in 4Q17

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GE’s 4Q17 operating margins

Now we’ll examine the 4Q17 operating margins of General Electric (GE). The company’s Industrial business margins reported a 560 basis-point contraction in 4Q17. The margin fell from 16.8% in 4Q16 to 11.2% in the last quarter of 2017.

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Why the industrial margins contracted

The sharp fall in the industrial margin was due to the poor performance of  GE Power and Oil & Gas segments. Barring the two verticals, the rest of the Industrial business margins were up 2% in 4Q17. The Power segment’s operating margin was 2.8%, down by a whopping 16.7%. Its operating profit was $260.0 million, down 88% on a year-over-year basis.

Baker Hughes’s (BHGE) margins were 5.3% in 4Q17, lower by 6.8% on a combined basis. Even GE’s legacy Oil & Gas business operating margins contracted by 880 basis points. GE Transportation’s operating margins contracted 650 basis points to 19% due to a 20% fall in revenue and 40% reduction in operating profit.

The fall in the Industrial operating margin was offset by the Healthcare segment where margins expanded by 130 basis points to 21.5%. In addition, the Aviation vertical’s margins were up 0.4% to 24.7% in 4Q17. Similarly, the Renewable segment also saw a 60 basis-point margin expansion in 4Q17.

Management’s insights

GE’s Power business was the main culprit for the huge margin loss in 4Q17. On the 4Q17 earnings call, General Electric’s CEO, John Flannery, said, “To improve margins, we launched SPRINT teams, focused on project execution with a laser-focus on attacking schedule and cost overruns. In 2017, our Grid business moved all schedules and cost into a centralized digital application. We linked all execution and billing milestones to the ERP and ensured cross-functional teams were aligned with the clarity of accountability and with the visibility to monitor progress or performance deviations.”

In the Aviation business, GE announced the world’s largest laser powder additive manufacturing machine in 4Q17. The company intends to leverage its additive capabilities and anticipates scaling up the pace of additive utilization to grow operating margins in 2018.

ETFs

Investors interested in indirect exposure to large-cap stocks can opt for the SPDR S&P 500 ETF (SPY). General Electric makes up 0.6% of SPY’s holdings. This ETF holds 1.7%, 0.8%, and 0.74% in industrial heavyweights Berkshire Hathaway (BRK.B), Boeing (BA), and DowDuPont (DWDP), respectively.

In the last part of this post-earnings series, we’ll turn to analysts for their take on GE after its 4Q17 results.

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