(Reuters) - For massive conglomerate General Electric Co (GE.N), the plunge in oil prices stands to both help and hurt. On Friday, investors could find in GE’s fourth-quarter report whether the pain has started to overtake the gain.
On the upside, cheap oil holds some promise if it helps GE’s customers in aviation, transportation and other businesses to prosper, or if sustained low energy costs give the broader economy a boost.
But there could be major problems for GE’s business that supplies equipment and services to oil and gas companies. Since 2007, GE has invested $14 billion in this once-fast-growing unit through acquisitions.
GE on Friday could reveal more about the extent of the fallout from low prices on its oil business, and any new silver linings.
“We recognize that lower oil prices will affect this business, but no one knows how much yet,” said Charlie Smith, chief investment officer of Fort Pitt Capital, which holds about 1 million GE shares.
The drop in oil has already pressured GE's share price, which has fallen some 5 percent this year, against a 1 percent decline for the Standard & Poor's 500 index .SPX.
The oil division accounted for 12.5 percent of overall revenue and 17.5 percent of industrial revenue in the first nine months of 2014. At its outlook meeting in December, GE said its oil business revenue could fall by as much as 5 percent this year and that it was looking to cut costs.
Since then, the price of U.S. crude CLc1 has dropped more than 14 percent. This has raised more questions about the unit, which relies on spending from oil customers that are slashing capital expenditure budgets.
Asked at the December meeting if cheap oil was good or bad for GE, Chief Executive Officer Jeff Immelt said: “It’s probably close to a wash to a slight negative... I would say when our customers make more money, they spend more, but it’s going to have an impact on our oil and gas business.”
Even without oil’s slide, GE faces challenges. On the one hand, its move to split off GE Capital finance assets and rely more on manufacturing earnings has won praise from many investors, who say industrial profits are more highly prized on the stock market and less finance exposure will make GE less risky.
But the move to shed finance assets such as its private label credit-card business will take overall earnings down over the next two years. GE forecasts a profit of about 60 cents per share from GE Capital this year, falling to about 40 cents in 2016.
Analysts on average expect GE to increase overall earnings per share by 6.4 percent in 2015 and by 5 percent in 2016, according to Thomson Reuters I/B/E/S.
Scott Lawson, vice president of investment management firm Westwood Holdings Group, said GE might be hard-pressed to reach even those comparatively modest expectations for 2016, as the oil pressures compound sluggish outlooks for two other core markets, healthcare and power.
“It’s kind of a challenge for them to grow over the next two years,” Lawson said. “Shy of a recession, most industrials should outperform that forecast that GE just outlined in December.”
For example, Wall Street expects earnings growth of 10.1 percent this year and 10.9 percent in 2016 for Honeywell International Inc (HON.N) and 9.8 percent this year and 9.4 percent in 2016 for 3M Co (MMM.N).
Editing by Eric Effron and Lisa Von Ahn