Industrial conglomerate General Electric (NYSE:GE) reports first-quarter earnings before market open tomorrow. It'll be sharing the stage tomorrow morning with another industrial titan, Honeywell International (NYSE:HON). The industrial sector is expected to report the largest year-over-year earnings decline of all eleven sectors in the S&P 500 (SPX) and eight out of the twelve industries are reporting or are predicted to report earnings declines, according to FactSet research. That same research says the airline industry is the largest contributor to the expected earnings decline; if they are excluded the estimated Industrials earnings decline improves from a 7% decrease to a 0.7% decrease.
As a result of its size and scope in industrials, GE has "felt every bump in this industrial recession that we have been in for the past 7 quarters," according to RBC analyst Deane Dray. Its shares declined just over 5% year to date while the SPX is up about 5%. It ended 2016 up 1.44%, lagging the SPX's 9.84% increase.
Last quarter, GE CEO Jeff Immelt said the company has "executed well in a slow growth and volatile environment" as revenue declined 2%. The company highlighted strength in its aviation, healthcare, and renewable energy businesses as positives. Immelt pointed out the company's failure to close "a couple of big power deals in tough markets" as a negative. Like many multinational companies, GE has faced foreign currency headwinds due to the strong dollar.
In addition to foreign currency exchange rates, low energy commodity prices have also been a challenge for many companies. GE is in the process of merging its Oil & Gas unit, which primarily manufacturers equipment, with oilfield services company Baker Hughes (BHI). The deal still requires regulatory approval. GE also announced it was selling its water business in a $3.4 billion cash deal during the quarter. The company has also recently discussed exiting its lighting business due to low margins.
For the first quarter, GE is expected to report earnings per share of $0.17 on revenue of $26.36 billion, according to consensus third-party analyst estimates. That's the lowest estimate for earnings and revenues in the past 8 quarters with earnings declining 19% and revenue dropping 4% compared to Q1 2016.
The options market has priced in a potential 2.0%share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim platform. At the monthly April 21 expiration, short-term options trading for calls has been active at the 30 and 30.5 strike prices and puts have been active at the 30 and 29.5 strikes. The implied volatility sits at the 29th percentile.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.
FIGURE 2: LAGGING THE SPX. GE shares have been down as part of a larger slump in the Industrials sector. GE has been trading in a pretty narrow range since dropping after last quarter's earnings. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Don't forget next week is a big one for earnings with some major players across sectors reporting. It's pretty tech heavy with results coming from Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Intel (NASDAQ:INTC) to name a few.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.