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GE’s Second-Quarter Results: No Break from GE Power’s Underplay

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Second-quarter revenues

On June 26, General Electric (GE) went “long” on its Power segment. The segment, which was at the center of the storm, continued to underperform. The segment’s share in General Electric’s Industrial segment’s gross revenues before corporate eliminations was 26% in the second quarter—compared to 33% the previous year.

The Power segment’s revenues declined 19% in the second quarter to $7.5 billion from $9.4 billion in the same period in 2017. Equipment revenues of $3.5 billion declined 24% YoY (year-over-year) due to seven gas turbines shipment in the second quarter—compared to 21 units a year ago. Services revenues fell 15% YoY to $4.0 billion. Reduced outages, an unfavorable mix of contract scope, and reduced gains from the long-term service agreement caused the services revenues to fall in the second quarter.

The vertical’s operating profit fell 58% to $421.0 million in the second quarter from $994.0 million in the same period last year. The operating margin contracted by 500 basis points to 5.6% during the quarter.

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Segment’s order book

In the second quarter, the Power segment’s total orders declined 26% to $7.3 billion. On the equipment front, the orders fell 29%, while services orders fell 22%. Equipment orders slid mainly in gas power systems, which witnessed a 78% order fall. Gas turbine orders were seven units—compared to 24 in the second quarter of 2017. Aero derivatives orders were three—compared to 12 in the second quarter of 2017.

GE Power’s services orders fell 22% in the second quarter. Excluding the divestiture of the waste business, the orders fell 17%. Contractual orders declined 5% due to reduced upgrades and outages. Transactional orders fell 30% due to reduced part upgrades.

Power segment insights

General Electric noted that new orders for gas turbines and aero derivatives shifted in the second half of 2018. Surprisingly, General Electric expected an improved order scenario in the Power segment in the second half of 2018—compared to the first six months. The company expected the power market on demand to trend below 30 gigawatts in 2018. With a focus on the division’s operational turnaround, General Electric has set a $1.0 billion cost-cutting target at GE Power in 2018.

Investors who are bullish on utility stocks could consider investing in the iShares U.S. Utilities ETF (IDU). IDU’s top holdings include NextEra Energy (NEE) at 10.01%, Duke Energy (DUK) at 6.98%, and Dominion Energy (D) at 5.77%.

Next, we’ll discuss Wall Street analysts’ take on the Power segment’s issue.

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