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GE and Honeywell earnings loom large for troubled industrials

Trevir Nath, director of content
David Cote
Ashlee Espinal | CNBC

The market received its first taste from the industrial sector this earnings season following reports from airlines, railroads and trading companies throughout the week. A common theme with the industrials has been the persistence of weak business conditions, resulting in negative growth.

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Prior to the season, the Estimize community was calling for a 6 percent decline on the bottom line and 1.2 percent on the top across the industrials. This has improved slightly to a 5 percent decline in profit growth due to better than expected results from airlines.

Tomorrow we get highly anticipated results from General Electric and Honeywell.

Year-to-date stock performance

Honeywell was in the news recently after lowering its upper end sales and profit forecast range, due to a slowdown in its aerospace and aviation division. Honeywell said sales would fall 3 percent in the third quarter, compared to the crowd's expectations of a 2 percent increase. For the year, profits are now expected to fall in the range of $6.60 to $6.64 a share, down from its previous forecast of $6.60 to $6.70, with sales down 1 to 2 percent from a year earlier. Shares were up double digits prior to the announcement but have since dropped by about 6 percent.

Of Honeywell's major reporting segments, performance materials and technologies continue to fare the worst. In the second quarter sales from the segment declined 3 percent from a weaker backlog of universal oil product processing, licensing and equipment sales. Honeywell insists that the sector will improve in the third quarter but not enough to offset the weakness in the aerospace division.

In its earlier report, Honeywell's upper brass cited a slowdown in its jet and general aviation business resulting from a decline in the oil and gas industry. Sales for the segment have edged down between -1 to 1 percent, right in line with the second quarter but lower than earlier projections.

One facet of the company that has performed well is automation and control solutions. The segment grew 9 percent in the second quarter on continued global growth, strength in its domestic business and further penetration of high growth regions. Some of this includes the creation of a new division based on Internet of Things. Embracing digital technology is a no-brainer, even in the industrial sector. That will help offset some of the losses in its other segments.

General Electric, on the other hand, is heading into its third quarter report with slightly higher expectations. Analysts surveyed at Estimize are calling for earnings per share of 32 cents on $29.91 billion. Compared to a year earlier that represents a 17 percent increase on the bottom line and 8 percent on the top. On average though, General Electric has only topped consensus estimates 32 percent of the time.

The industrial conglomerate has seen steady improvements in recent quarters despite the massive divestiture of GE Capital. The move will separate the namesake General Electric from its capital division and is nearing completion. Since it was first announced in April 2015, GE has reportedly sold $193 billion worth of business, $7 billion short of its goal intended for the end of 2016.

Without GE Capital, power and aviation are now the two largest portions of the business, with health care not too far behind. These divisions will continue to be the centerpiece of earnings and should continue to show improvement given several recent acquisitions. Investors are more likely to be interested in the company's newfound focus on technology. General Electric, like Honeywell, is embracing industrial technology with its GE Digital division. The segment grossed $1.3 billion in revenue last quarter through gains in power and health care segments. Recent acquisitions of LM Wind Power and two 3D printing companies will help streamline future operations.

Early reports from the industrials look as though the sector is headed for yet another weak earnings season. Tomorrow's reports from two mainstays of the industry will either further perpetuate the ongoing trend or be the start of a much needed reversal.

How do you think these names will report? Be included in the Estimize consensus by contributing your estimates here.