General Electric falls short in fourth quarter but offers stronger 2018 outlook

Key Points
  • General Electric reports fourth-quarter earnings that miss Wall Street estimates.
  • GE says cash performance was better than expected.
  • The company removed $1.7 billion in structural costs in 2017, and it's targeting more than $2 billion in 2018.
  • GE says it plans to announce a new board with its 2018 proxy.
General Electric reports fourth-quarter earnings miss

Investors were reminded Wednesday of the challenges that lay ahead for General Electric, as the company reported steep revenue declines and said it was being investigated by the Securities and Exchange Commission over its accounting practices.

GE's fourth quarter fell short of Wall Street's expectations, but it offered up a stronger-than-expected outlook for 2018. That news initially lifted GE shares in premarket trading, but during its investor call, the company revealed its recent review of its GE Capital insurance portfolio was under scrutiny and it would be restating two years of financial results. The stock was down slightly early in Wednesday's regular trading session.

In the latest period, the conglomerate swung to a loss from continuing operations of $10.01 billion, or $1.15 per share, from earnings of $3.48 billion, or 39 cents per share.

Stripping out charges, GE earned 27 cents a share, or about 2 cents per share less than what analysts surveyed by Thomson Reuters were expecting.

Revenue fell 5 percent to $31.40 billion from $33.09 billion a year ago. Revenue was far less than analysts expected, with Thomson Reuters reporting an average revenue estimate of $34.06 billion.

A portion of the charges taken in the fourth quarter are at the center of the SEC's investigation. GE's review led it to take a $6.2 billion after-tax charge. The company also plans to contribute $15 billion to the unit over the next seven years to shore up its portfolio.

The SEC wants to know more about the process that lead to the insurance reserve increase and the change. It also has questions about its revenue recognition and controls for its long-term service agreements, GE Chief Financial Officer Jamie Miller told investors.

The company said it is cooperating with the investigation.

The earnings were the second under CEO John Flannery, who has embarked on an extensive review of the company's business.

Flannery cheered the improvements the company made in the latest period.

"Our results this quarter demonstrate some of the early progress we are seeing from our key initiatives," Flannery said in the company's press release. "The team is focused
on operational execution, capital allocation and deep cost reduction to position us for continued improvement in 2018."

The company says its cash performance in the latest period was better than expected.

GE said its industrial businesses generated adjusted cash flow of $7.76 billion. That figure excludes taxes on deals, the costs of GE's pension plan and its oil and gas business. It includes a dividend from its ownership of Baker Hughes.

Results vs. expectations:

  • EPS: 27 cents vs. 29 cents expected by Thomson Reuters.
  • Revenue: $31.4 billion vs. $34.06 billion expected expected by Thomson Reuters.

GE said it removed $1.7 billion in structural costs in 2017, above the $1 billion it was targeting for the year. The company says it aims to remove $2 billion more this year.

GE gave an upbeat outlook for 2018, saying it expects adjusted earnings per share to range $1 to $1.07 in the coming year. The industrial giant also plans to announce a new board with its 2018 proxy.

"2018 is a critical year for us, and we intend to continue demonstrating in the coming quarters that our new approach is working and the organization is changing," Flannery said on a conference call with investors.

Many expect that GE is looking to split up the company, possibly as early as this spring.

Investors are evaluating GE's value through sum-of-the-parts analyses, looking to find which segments have the legs to stand alone. According to FactSet, eight firms updated the price target on GE shares in the week before its fourth-quarter earnings — and all of them were lower. Bank of America Merrill Lynch, which downgraded the stock Monday to neutral from buy, wrote in a note that the firm expects GE to slash its 2018 outlook when GE reports its earnings.

The company's stock has declined more than 43 percent over the past year as of Monday's close, making it the worst performing stock among the Dow Jones industrial average.