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I feel the pain of General Electric (NYSE: GE) shareholders right now (because I am one). The industrial conglomerate has seen its stock price drop by more than 60% over the last five years, even as the S&P 500 has chalked up a nearly 50% gain.
GE's Q2 report was definitely a mixed bag, but that's at least a step up from the terrible earnings reports it was churning out in 2018. So the market's reaction -- shares are down 11.4% since the announcement -- seems unusually harsh. Here's what investors are missing from GE's earnings report.
General Electric's top division, aviation, suffered in Q2. Image source: Getty Images.
A powerhouse division was left sputtering
The stock market -- and the post-earnings coverage -- seemed to focus heavily on the weaker-than-expected results from the company's healthiest segment, aviation. It's not hard to see why. The troubled power division's ongoing underperformance is behind many of the company's woes, and renewable energy has also been a dud lately. That's left high-margin aviation to pick up the slack as one of the rare bright spots in GE's portfolio.
But those bright spots were noticeably dimmer in Q2. In aviation, orders were down 10% compared to Q2 2018. Profits also slipped by 6% year over year as profit margin fell by 200 basis points to 17.6%. Orders, profits, and margins were even down -- albeit by smaller amounts -- when comparing the first six months of the year to the first six months of 2018. Weakness in aviation orders contributed to overall orders for the company falling by 4% from the prior year's Q2 to $28.7 billion.
The ongoing grounding of the Boeing 737 MAX jet -- for which GE's aviation segment exclusively manufactures the engines -- is very much in the news, and there are legitimate concerns that a prolonged production halt could cause existing customers to cancel their orders, which would have a serious impact on aviation.
However, there are several positive signs that the market seemed to overlook.
All in the timing
GE's Q1 earnings report was flat-out bad, but it wasn't as bad as analysts were predicting. At the time, CEO Larry Culp warned investors not to read too much into that, citing orders that were unexpectedly booked in Q1 that would otherwise have come in Q2. So it's no surprise that Q2's orders were down -- some of those were already booked in Q1.
Also worth noting: GE's aviation division also secured a record $55 billion in orders at the Paris Air Show, which occurred during the second quarter. While you could argue that this is cause for concern -- a record number of Paris Air Show orders ought to result in an increase in segment orders, not a decline -- it goes to show that there are still a lot of customers who are buying what GE's aviation segment is selling, even with the 737 MAX's grounding.