The new CEO and Chairman of General Electric John Flannery’s first quarter is turning about to be a busy one. The new CEO is on a mission to clean up the company. His re-structuring plan includes getting rid of about $20 billion worth of businesses over the next couple of years to reduce costs and streamline the vastly spread out conglomerate.
The substantial restructuring costs impacted the company’s third quarter earnings, which were already short of its target. GE’s third quarter profit was $1.8 billion, which is about $0.21 per share, versus last year’s third quarter result of $2 billion or $0.22 per share. Adjusted earnings per share (excluding the restructuring costs) dropped from $0.32 per share to $0.29 per share. The restructuring costs impacted the company’s earnings per share by $0.16. Even without the restructuring costs, GE’s EPS was below the consensus target of $0.49 per share.
John Flannery’s Strategy
CEO John Flannery also reduced the company’s earnings target for the year. The company’s adjusted 2017 profit-per-share target has been lowered from $1.60 – $1.70 to $1.05 – $1.10. Analysts’ current expectation for earnings per share for 2017 is $1.54.
Cash flow targets for 2017 have been cut down from $12 billion to $14 billion to $7 billion. This is almost half of the original target and the largest cuts are to come from the beleaguered power division of the company.
Trian Fund Management, which joined GE’s board of directors earlier this year, had already insisted the company implement a $1 billion industrial cost cutting measure. On this metric, the company is ahead of its goal. Industrial costs are down by $1.2 billion already, $500 million ahead of its promise.
GE’s revenue was higher than consensus targets for the third quarter. Revenue reported $33.5 billion (up 14% from the same time last year) as compared to the target of $32.56 billion. This revenue jump was in main due to the merger of the company’s oil-and-gas unit with Baker Hughes earlier in the quarter. Thanks to the merger, the oil-and-gas unit’s revenue was up by a massive 81% compared to a year ago. However, without the new assets, the division’s revenue was down 7%.
The aviation and health care divisions of the company showed growth. Unfortunately, power, lighting and transportation all showed drops in revenue. The transportation division was the hardest hit, with a 14% drop in revenue.
The earnings report was released just before trading started on Friday and company stocks fell sharply by 6.3% literally minutes after the markets opened. GE’s stocks actually fell 8.8% in pre-market trading. Thankfully, the stocks rallied and ended up just 0.6% down towards the late afternoon. GE’s stock was the most actively traded in the US market, with volume going up to 135 million shares – more than three times the average daily amount. GE stocks have dropped 25% this year.
Detailed Strategy of CEO
On November 13, Mr. Flannery is expected to give the company’s investors a detailed strategy on how the company is to be re-structured. The new CEO has not been slow in already implementing cost cutting measures such as cutting unnecessary jobs, research operations as well as executive perks such like corporate jets, company cars and the costly executive holiday retreat.
Mr. Flannery has called on all division leaders to reassess their businesses and chalk out plans improve their performances. The new CEO also plans to streamline the company’s varied global research divisions and is closing down the research facilities in Munich, Shanghai and Rio de Janeiro.
Investors are concerned that all the turbulence in the company would negatively impact dividend payouts this year.