Instant Analysis: General Electric Company Prepares Investors for 2017

By Lee


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What happened

General Electric Company (NYSE: GE) held its annual outlook meeting on Wednesdayand updated investors on what to expect in 2017. Let's take a look at the headline numbers and whether they change the investment thesis on the stock.

First thing to note is that the guidance for 2016 is pretty much in line with guidance given on the third-quarter earnings call.Turning to the all-important 2017 outlook:

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  • Full-year operating-earnings-per-share forecast to be in the range of $1.60 to $1.70, which straddles analyst consensus of $1.67.
  • Margin expected to expand by 100 basis points (1%).
  • Organic revenue growth of 3% to 5%, a range notably ahead of peer Illinois Tool Works'recent outlook.
  • The Alstom energy acquisition and Baker Hughesmerger are on track.

It's a tale of margin expansion and organic revenue growth ahead of its peers, with EPS set to grow in a range of 6.7% to 13.3% compared to the expected $1.50 in EPS in 2016.

In discussing end-market conditions in 2017, CEO Jeffrey Immelt described being at his most optimistic about the U.S. economy in many years. That may seem an odd statement to make, but Immelt expects good growth in three of its four main end markets (power, aviation, and healthcare) while oil and gas -- the main problem area in 2016 -- is stabilizing. The Baker Hughes merger is unlikely to reduce exposure to oil price sensitivity, but it will create extra growth opportunities provided that the market starts to steady itself.

As an example of the positive end-market outlook, note that services revenue (GE's services generate higher margin than its products) is expected to increase 7% in 2017, an important improvement on 2016's growth rate of 3%.

Does it matter?

Frankly, there wasn't anything surprising about General Electric Company's headline guidance. Management is executing very well with Alstom and key products like HA-turbine and the LEAP engine. Moreover, the pivot to becoming an industrial-focused company continues apace, with management promising productivity improvements.

For instance, industrial free cash flow conversion from industrial operating net income is set to rise from 85% in 2015 to 95% in 2018. Moreover, the company's leadership in the industrial internet looks assured: Management expects more than $1 billion in orders powered by Predix (its cloud-based platform-as-a-service solution) in 2017, up from $300 million in 2016.

All told,General Electric Company's 2017 outlook implies continued execution in line with its long-term strategic plans. While that's a good thing for investors, there wasn't really anything new in the outlook to change the investment thesis.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. The Motley Fool recommends Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.