Source: PaxForex Premium Analytics Portal, Fundamental Insight

General Electric's latest statement to investors has left Wall Street analysts worried that the industrial giant's third-quarter report may not be as positive as many had expected. Those concerns extend not only to the expected third-quarter numbers but also to recommendations and comments from the company's management about the near-term outlook.

For a company as diverse as GE, it's not a bad idea to separate the issues by individual segments, not least because there was something about each of them in the update. 

For the record, management's plan is for GE Aviation to return to its former glory in line with the recovery of commercial aviation. Meanwhile, GE Healthcare should remain a reliable generator of profits and cash flow, and management plans to improve the profitability of GE Power and GE Renewable Energy through improved execution.

A recent announcement by Vice President of Investor Relations Steve Winoker doesn't indicate those plans are off course -- management still plans for high-digit free cash flow margins by 2023 -- but there may be some sticking points along the way.

• GE Aviation

In commercial aviation, Winoker noted the impact of Delta variants surge and new travel restrictions in August, but said that "at this time, we do not foresee a change in our forecasts of store visits that we have provided," given the "delay between departures and store visits." If this prediction is correct, all-important commercial aviation aftermarket sales for the company should reach expected numbers in 2021. That said, if the pandemic has a further negative impact on departures, it will be reflected in lower store visits in the future.

Of the more pressing issues, Winoker noted that the supply chain problems that plagued the company's military business in the second quarter continued into the third quarter. Moreover, GE incurred a $400 million non-cash charge in the second quarter under the contractual services agreement and expects to incur further charges -- though less than in the second quarter -- in the third quarter due to the analysis.

So far, so good. Commercial aviation revenue is key to GE's finances, and investors will be happy if it meets expectations and expenses are non-cash. However, investors will keep an eye on the state of the military business, as well as a possible slowdown in the recovery in departures.

• GE Healthcare

The most troubling part of the update was Winoker's statement that pandemic supply chain challenges mean that the company's healthcare business will face "sustained pressure" in the third and fourth quarters. Moreover, he said, the "challenging environment" will continue through the first half of 2022.

On the one hand, Winoker reiterated GE's full-year forecast for low to mid-single-digit revenue growth. On the other hand, the range of forecasts is quite wide for relatively low-growth business, and estimates for 2022 may have to be lowered due to updated trading conditions.
This is a concern given the importance of the health care segment's cash flow to the industrial company.

• GE Power

The least affected segment, GE Power, will show a consistent decline in margins in the third quarter. Nevertheless, this is not unusual, as the third quarter typically sees fewer power outages (and therefore lower service revenue for this segment) than the second and fourth quarters. Thus, on a positive note, Winoker reaffirmed confidence in his earlier prediction of a high single-digit percentage of segment profitability for the full year.

It was somewhat disappointing that Winoker did not echo CEO Larry Culp's comment made during the second-quarter earnings report that natural gas energy services would likely "do better than the low single-digit revenue percentage" that was projected at the beginning of the year. However, this may well just be conservatism on the part of management.

• GE Renewable Energy

Finally, Winoker restated what management said during the last report about the possibility of risk to orders and cash flow due to potential changes to the U.S. Wind Turbine Production Tax Credit (PTC), which expires at the end of 2021. An extension of the PTC could hurt GE's near-term orders, as customers could defer their spending. However, such an extension would be favorable for the segment in the medium term.

Interestingly, no pressure on margins due to rising raw material prices or supply chain issues was mentioned. That is somewhat surprising since the company's two largest competitors,

Vestas and Siemens Gamesa, lowered their earnings and margin forecasts over the summer. 

The third quarter may be volatile, but GE's problems in aviation and health care look temporary and will likely be resolved in the coming quarters. In addition, the energy business is showing good momentum. As for renewables, the fact that Winoker refrained from lowering expectations based on cost and supply chain pressures should be seen as a positive, and the possibility of a PTC extension is probably good news in the medium term.

Overall, investors shouldn't be surprised if GE doesn't raise its outlook during the next earnings report, but they may well expect the company to remain on track to meet its medium-term goals.

As long as price is below the 108.30 level, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 108.30
• Take profit 1: 94.60
• Take Profit 2: 91.90

Alternative scenario:

If the level of 108.30 is broken-out, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 108.30
• Take profit 1: 113.10
• Take Profit 2: 116.10