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GE - The Bigger They Are, The Stronger They Grow
Posted by: Sarfaraz A. Khan (IP Logged)
Date: April 28, 2014 02:12PM

Earlier this month, General Electric (GE) reported its first quarter results. The company is now refocusing on its core area, the industrial business, as opposed to GE Capital. Over the last five years, the top and bottom-line growth of its industrial segment has remained in the low-single-digits. However, three of its biggest industrial segments have started this year with double-digit growth.

Although General Electric has witnessed a decline in revenues, that was largely due to the smaller contribution from GE Capital. Its core area, the industrial unit, continues to grow. Moreover, the company is also eyeing significant margin expansion of the industrial unit through 2016.

For the full year, General Electric has forecast organic sales growth of between 4% and 7% and profit growth of 10% of its industrial units. The company does not give earnings estimates but analysts, as per data compiled by Bloomberg, are expecting are expecting earnings of $1.70 per share, which would show a 3.4% growth from earnings of $1.64 per share in 2013.

Moreover, the company is eyeing some serious inorganic growth through acquisition of the France-based maker of trains and power plants in a massive $13 billion deal.

The company’s shares have risen by 20.3% in the last 52 weeks, better than the S&P 500, which is up 18.5% in the same period.

Quarterly Earnings

General Electric’s quarterly revenues dropped by 2.2% from the same quarter last year to $34.18 billion while its net income fell 15% to $3 billion. However, excluding the impact of the sale of the company’s stake in NBC Universal to Comcast (CMCSA), and other charges from discontinued operations, General Electric’s earnings were up 9% to $0.33 per share, one cent above analysts’ estimates.

Meanwhile, the company has been selling assets of GE Capital, whose size, also referred to as ending net investment, shrunk by 7% to $374 billion.

GE Capital’s North American consumer business will get listed this year through an initial public offering.

Industrial Segment

General Electric’s industrial segment has been the backbone of the company and could become even more crucial in the coming years. Last year, the segment was responsible for around 55% of General Electric’s earnings. By 2016, General Electric has forecast the segment will generate 70% of its earnings.

Over the last five years, the industrial unit’s growth has been modest, at best. Since 2009, its revenues and income has risen at an overall rate (CAGR) of 3.16% per year and 2.48% per year, respectively.

Year

2009

2010

2011

2012

2013

Revenue (in US$Mn)

$88,681

$85,216

$95,225

$102,811

$103,602

Profit (in US$Mn)

$14,352

$14,130

$14,068

$15,486

$16,220

In the previous quarter, however, General Electric’s revenue and profits from industrial units rose 8.3% and 11.7%, respectively. This increase can be attributed to a better performance of oil and gas equipment, jet engines and turbines.

With a greater increase in profits than costs, the margins in the industrial segment improved to 13.4% in the first quarter from 12.9% of same quarter of 2013. The company expects the margins to expand to 17% by 2016.

General Electric has been trying to cut back on its expenditure in an effort to improve its profitability. In this respect, General Electric has taken several measures such as layoffs and consolidation of facilities. The company has targeted $1 billion in structural cost reduction, of which, it reported reductions of $254 million in the current quarter.

Leading Industrial Segments Driving Growth

In the industrial segment, the oil and gas sector witnessed strongest growth of 26.7%, partly attributed to acquisitions like Cameron International (CAM)'s compression unit as it eyes growth in the American shale market. Oil and gas backlog has grown by 15% for equipment and 4% for services. General Electric is optimistic about the future of this segment due to the estimated growth in the energy industry through 2018.

Similarly, power and water units also witnessed a double-digit growth of more than 14% due to increased sales of wind turbines and power plant equipment. The company has capitalized on the strong demand for renewable energy. In 2014, General Electric has predicted sales of 3,000 wind turbines, 1,000 more than last year. The segment could continue growing at a rapid pace throughout the current year.

General Electric’s biggest segment, Aviation, also witnessed double-digit growth as its revenues rose nearly 14% from last year to $5.78 billion. The company is reporting higher engine shipments as Boeing (BA) and Airbus (EADSF) deliver their jets to airliners.

The increase in the sale of jet engines will later translate into higher recurring revenues from engine maintenance, repair and overhaul.

Meanwhile, the company will sell around $4 billion of its non-core industrial assets in the current year.

The French Acquisition

During the conference call, General Electric said that the company is also prepared to dole out between $1 billion and $4 billion over acquisitions. But last week, Bloomberg revealed that General Electric is mulling the purchase of Alstom for $13 billion. The Wall Street Journal, on the other hand, thinks that General Electric is only interested in the French company’s energy assets.

Interestingly, the French economy minister wants Alstom to stay French and is planning to discuss the issue with General Electric. Some government officials are more interested in a new offer, coming from the German Siemens (SI), in which it wants to swap its train business with Alstom’s energy operations. The French president, however, does not oppose General Electric’s takeover.

The drama is currently unfolding but the deal could be announced within weeks.

 

 

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.



Stocks Discussed: GE, CMCSA, CAM, BA, EADSF, SI,
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