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Will Higher Healthcare Revenues Boost GE's Q4 Earnings?

Industrial goods manufacturer General Electric Company GE is scheduled to report fourth-quarter 2017 results before the opening bell on Jan 24. The company’s Healthcare segment is likely to report higher revenues in the quarter owing to improved market dynamics.

Whether this can buoy the bottom line of the company remains to be seen.

Impressive 3Q Performance

In third-quarter 2017, GE Healthcare’s revenues had jumped 5% year over year to $4,724 million with orders up 6% to $5.1 billion. On an organic basis, orders increased 4% in the domestic market, 8% in Europe and 11% in emerging markets driven by 20% growth in China. On a product basis, healthcare system orders grew 5% year over year, primarily led by higher demand for ultrasound and imaging products (up 11% and 8%, respectively) along with mammography and CT. Order for life sciences products were up 14%, driven by bioprocess (up 17%) and core imaging (up 9%).

Operating profit was up 14% to $820 million, driven by volume and productivity gains partially offset by price and program investments. Operating margin expanded 140 basis points to 17.4%.

Accounting for 14.1% of total revenues in third-quarter 2017, Healthcare forms an integral part of GE as CEO John Flannery intends to focus on three core segments — Power, Aviation and Healthcare.  He aims to gradually exit all other businesses to plug the downtrend in the company’s shares. Incidentally, GE was the worst performer of the Dow Jones Industrial Average in 2017, tanking 44.8% in the year.

The Zacks Consensus Estimate for Healthcare revenues in fourth-quarter 2017 is currently pegged at $5,247 million compared with $5,101 million reported in the year-ago quarter. Operating profit for the segment is expected to be $1,103 million, up from $1,030 million in the prior year.

Overall 4Q Expectations

The Zacks Consensus Estimate for the Industrial segment profit in the to-be-reported quarter is currently pegged at $4,954 million compared with year-ago profit of approximately $5,842 million. Almost all the sub-segments within the Industrial segment are likely to record leaner profits on a year-over-year basis except Healthcare. Total Industrial segment’s revenues are likely to be marginally up to $31,570 million from $31,236 million in the year-earlier quarter, although total corporate revenues are expected to be down to $32,693 million from $33,088 million.

The company is likely to report lower industrial segment profit in the quarter owing to higher operating costs and $6.2 billion charges from the legacy insurance business. GE’s fourth-quarter earnings are likely to be hit by high overall expenses with the Zacks Consensus Estimate being pegged at 28 cents. (Read more: Will Lower Industrial Segment Profit Hurt GE's Q4 Earnings?)

Moving Forward

Flannery has termed 2018 as a “reset year” and is seriously contemplating to spin off its operations to maximize shareholder returns. In addition, GE aims to reduce overhead costs by $2 billion in 2018, majority of which is likely to come from the power segment that sells electrical generation equipment. The company further intends to sell assets worth $20 billion to improve its liquidity. Also, the company halved its quarterly dividend to 12 cents per share — the first dividend cut since 2009 at the peak of the recession.

Amid such drastic portfolio restructuring initiatives, management has decided to continue its thrust for the Healthcare segment, which remains one of the three core segments for the company.

Other stocks from the industry that are likely to report their fourth-quarter earnings soon include 3M Company MMM, Honeywell International Inc. HON and United Technologies Corporation UTX.  

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