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GE Misses but I Am Staying Bullish
Posted by: Sarfaraz A. Khan (IP Logged)
Date: February 26, 2014 10:30AM

Last month, General Electric (GE) reported results for the final quarter of 2013, which disappointed investors as the company’s margins were below expectations. The company’s shares have fallen by 7% since the earnings release and look attractive for long term investors. The company is eying improvements in sales and profitability in the near future. At these price levels, the company offers attractive yield of 3.48%, which is considerably above the industry’s average of just 1.65%.

Earnings and Revenue Growth

In its previous quarterly results General Electric witnessed a 4.8% year-over-year growth in earnings to $4.20 billion. The company’s adjusted earnings came in line with consensus estimate of $0.53 per share. The earnings growth was driven by strong performance in oil and gas, aviation and financing (GE Capital) businesses. This is shown in the picture below.

With the exception of energy management, General Electric has managed to grow its income in all of its operating areas. Energy management’s decline had a small impact on General Electric’s bottom line as it is one of the smallest segments of the company. The underperformance of this segment, however, was one of the main reasons why the company missed its profitability target (discussed later in the article).

General Electric gets 31% of its total segment profits from GE Capital, 24% from the power & water segment and 16% from the aviation segment.

Overall, this was not a poor performance.

General Electric’s earnings growth has come on the back of a 3.1% year-over-year increase in revenues to $40.38 billion, which was above analysts’ expectations of $40.27 billion. The revenue growth was driven by 81% growth in equipment orders in the power & water segment, mainly thermal and wind equipment.

General Electric reported 65 orders of gas turbines in the fourth quarter, which is way higher than 26 order in the corresponding period last year. This is a clear sign of strong demand for the gas turbines. The company is eyeing another strong year for gas turbines, as well as wind, in 2014.

On other hand, investors should note that Alcoa Inc. (AA) has forecast a decline of 8% to 12% in gas turbines sales in 2014 due to the increase in the U.S. gas prices. This means that while General Electric remains optimistic about the demand of heavy duty gas turbines, investors should remain cautious due to Alcoa’s warnings.

The company’s Power & Water business is its biggest industrial segment and contributes 19% to the General Electric’s revenues. The gas turbine sales represent a significant portion of the segment’s revenues.

General Electric’s oil and gas and aviation segments, that drove the company’s earnings growth, also made considerable contribution towards its revenues. Both segments reported double-digit growth rates, which was considerably higher as compared to other segments.

General Electric’s segment performance is shown in the picture below.

Segments

Sales 4Q12

(In Millions)

Sales 4Q13

(In Millions)

% Change

Power & Water

$7,652

$7,686

0.4%

Oil & Gas

$4,548

$5,306

16.7%

Energy Management

$1,934

$2,012

4.0%

Aviation

$5,467

$6,170

12.9%

Health Care

$5,183

$5,117

-1.3%

Transportation

$1,364

$1,460

7.0%

Appliance & Lighting

$2,068

$2,196

6.2%

GE Capital

$11,605

$11,077

-4.5%

GE Capital reported a decline in revenues. The company has been focusing on its core areas (industrial units) and is targeting a reduction in the size of its financial business by 2015.

Profitability

In the fourth quarter, General Electric managed to expand its industrial margin by 0.66 percentage-points. However, the supply issues related to the wind turbine blades and the underperformance from energy management (discussed earlier) meant that the company failed to meet its target of achieving a 0.7 percentage-point increase in industrial margins.

On a positive note, for the current year, General Electric has planned to increase the margins of its industrial units to 17% from 15.7% last year.

General Electric has been streamlining its businesses and cutting down costs, which will continue throughout 2014. Last year, the company reduced $1.6 billion from structural costs and will cut more than $1 billion in the current year. The cost cutting will drive the company’s earnings growth during its transformation period. The company is trying to reduce its reliance on its finance business and increase its focus on its industrial units.

Conclusion

General Electric’s quarterly revenues were in-line with estimates and its earnings were better than Wall Street’s expectations. The company, however, has been punished for missing the profitability targets in its industrial units and since then, its shares have been under pressure. The company’s shares are currently trading at $25.27 and look undervalued.

The company is reducing its reliance on the financial segment. GE Capital was the biggest contributor to General Electric’s bottom line but is also highly volatile. A reduction in exposure to this segment will bring stability to General Electric’s earnings growth.

The company’s oil and gas and aviation units have been impressive and are making up for the sluggish growth in the power and water segment. The company could continue growing its top and bottom line on the back of strong performance from these two segments, despite warnings for a possible decline in the gas turbine market.

For the current fiscal year, General Electric has forecast organic growth of between 4% and 7%. The company’s backlog is currently at all-time high levels of $244 billion, which is nearly as big as its market cap. Therefore, the current organic growth target looks achievable.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

Notes: GE Quarterly Results Press Release [Pdf]



Stocks Discussed: GE, AA,
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Re GE Misses but I Am Staying Bullish
Posted by: chompinchuck (IP Logged)
Date: February 27, 2014 07:28AM

Everyone is always bullish on GE.  The best time ever was the last year Belch was at the top.  I remember well his CNBC outings back then and my favorite was the show where he said GE would reduce expenses by $10 billion a year via the Internet and that earnings would grow 17-18% for the foreseeable future.  GE had some reallly stimulating things going on withing the financial statements- all kinds of stuff that was written about by the "leftist outsiders" at the time that CNBC of course chose to discredit.  

He quit; the company reported the largest write-off in insurance history ($3.8 billion); all kinds of fun stuff within the financial statments began to unravel (read: pension bleed by upping the expected return when others were lowering theirs; stock options paying expenses- Levitt says "they count"; running the entire operation on train wreck short term commercial credit; insurance reserve deficiencies; lending reserve deficiencies; sending the entire manufacturing oversees for the low tax rates and trying to grow earnings at 17-18% on 3% sales growth; and on and on.

Yes, GE is always the darling of Wall Street.  Always.  They buy trendy businesses paying retail, and they sell businesses (often that they just bought during the trendy times) that are in the "wrong" fields for the go-go "in" crowd at fire sale prices.  Note: They were selling insurance, lending, media, at the very same time that others, like Berkshire, were buying.

Go GE go.  Do the "right" thing for the moment......that will be the wrong thing tomorrow.



Stocks Discussed: GE, AA,
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