Will Weak Margins in Aviation Segment Hurt GE's Q1 Earnings?

General Electric Company GE is scheduled to report first-quarter 2018 results on Apr 20, before the opening bell. The company’s Aviation segment is likely to report lower profit in the quarter, thanks to challenging market conditions.

Modest Q4 Performance

In fourth-quarter 2017, GE Aviation revenues were flat year over year at $7,222 million, as Equipment revenues (which declined 6% on fewer legacy engine shipments) offset higher LEAP engine shipments. Services revenues improved 6% on higher commercial spares and military.

Orders rose 11% to $8 billion, driven by Equipment and Services. Equipment orders rose 2% year over year, while service orders grew 17% (driven by higher commercial spares business).

Operating profit of $1,786 million was up 2% primarily driven by favorable volume and mix, cost productivity and value gap, partially offset by margin pressure from higher LEAP shipments. Operating margin expanded 40 basis points (bps) to 24.7%.

Accounting for 23% of total revenues in fourth-quarter 2017, Aviation forms an integral part of GE as CEO John Flannery intends to focus on three core segments — Power, Aviation and Healthcare. He aims to gradually exit all other businesses to plug the downtrend in its shares.

The Zacks Consensus Estimate for Aviation revenues in fourth-quarter 2017 was pegged at $7,091 million compared with $6,804 million reported in the year-ago quarter. Operating profit for the segment was expected at $1,352 million, down from $1,684 million in the prior-year quarter. The downside was caused by pressure from higher LEAP shipments.

Overall Q1 Expectations

The Zacks Consensus Estimate for theIndustrial segment profit in the to-be-reported quarter is currently pegged at $2,660 million, reflecting a decline of 26.6% from the year-ago quarter’s figure of $3,622 million. Total revenues for the industrial segment are likely to decline to $26,425 million sequentially, from $32,214 million in fourth-quarter 2017.

The company is likely to report lower industrial segment profit in the quarter, thanks to higher operating costs. GE’s fourth-quarter earnings are likely to be hit by high overall expenses with the Zacks Consensus Estimate being pegged at 11 cents. (Read more: Weak Power & Transportation Margins to Hurt GE's Q1 Earnings)

Moving Forward

Flannery has termed 2018 as a ‘reset year’ and is contemplating to spin off its operations to maximize shareholder returns. In addition, GE aims to reduce overhead costs by $2 billion in 2018, majority of which is likely to come from the power segment that sells electrical generation equipment. The company intends to sell assets worth $20 billion to improve liquidity.

Amid such drastic portfolio restructuring initiatives, management decided to continue with its inclination for the Aviation segment, which is one of the three core segments.

Other stocks from the industry that are likely to report their first-quarter 2018 earnings include 3M Company MMM, Honeywell International Inc. HON and United Technologies Corporation UTX.

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