The oil and gas business remained a significant drag in the third quarter, but we're maintaining our fair value estimate of $30 per share.
Following wide-moat GE'
s third-quarter earnings report, we’re maintaining our fair value estimate of $30 per share. GE managed to eke out industrials' segment organic revenue growth of 1% year over year, as ongoing weakness in the oil and gas business masked otherwise robust 6% organic sales growth throughout the rest of the industrial portfolio. In particular, sales strength persisted in power, aviation, renewables, and the ongoing turnaround in healthcare as new products in each of these segments continued to see healthy demand. That said, oil and gas remained a significant drag on the overall portfolio, as recent signs of life in both rig and well counts haven’t yet translated into improved levels of spending in GE’s customer base. Nevertheless, the investments GE made in research and development since the Great Recession appear to be paying off, as new products like the HA-Turbine, the LEAP engine, and the company’s growing digital services portfolio continue to resonate with customers despite persistent reports of a slow global growth environment across the industrial sector.
Barbara Noverini is a senior equity analyst for Morningstar.
Including Alstom, industrial gross margins improved 120 basis points year over year to 27.8%, reflecting progress in GE’s ongoing efforts to drive excess cost out of the portfolio. Notably, service margins climbed 220 basis points year over year as the deployment of analytics technology continues to drive positive results throughout GE’s services portfolio. While oil and gas will undoubtedly remain a near-term challenge for GE, we like that the company has plenty of opportunity in the remainder of the portfolio to offset further underperformance in the segment. With the Alstom integration progressing as expected, momentum building in digital, new product ramp-ups proceeding well, and cash on hand for additional buybacks if necessary, we’re still confident the company can hit its 2018 earnings target of $2.00 per share.
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