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Stock Strategist

GE Offers High-Quality Earnings in a Slow-Growth World

Its latest results show resilience in the face of macroeconomic volatility.

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 General Electric’s (GE) second-quarter results held no surprises, and we’re maintaining our $30 fair value estimate and wide-moat rating. The industrial behemoth continues to face a challenging global backdrop, particularly in resource-driven industries, which once again translated to steep declines in sales activity in its oil and gas and transportation segments. As a result, GE’s industrial segment revenue declined nearly 1% year-over-year on an organic basis, despite otherwise healthy sales in power, aviation, and healthcare.

Despite sluggish organic revenue growth, industrial operating margins (excluding Alstom) managed to remain flat year over year at 14.2%, reflecting ongoing progress in GE’s cost-cutting initiatives as well as some benefits from pricing outpacing inflation. These factors helped improve gross margins by 110 basis points since the prior period, which offset some of the negative impact of product mix in the quarter. As GE continues to work excess costs out of its legacy industrial businesses as well as newly acquired Alstom, we expect stronger operating leverage as volume improves across the portfolio.

Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.