The U.S. conglomerate, General Electric (GE, Financial), posted its final quarter results of the fiscal year 2014 on January 23 that made investors rejoice and added relief to the speculative analysts as the company managed to post a good set of numbers amid declining oil prices that is creating a ripple in the industry segment of GE. Luckily, the oil and gas segment survived from being hurt from the plunging price of crude, but the outlook on this sector going forward remains cautious from the management’s corner. Let’s directly get into the number mix to decipher what were the key highlights from GE’s fourth quarter of 2014.
Looking into the quarter numbers
Analysts were expecting the earnings to be down due to tumbling oil prices and a depressed Europe economy which could drag the bottom line of the company but the actual numbers did convey a different story altogether. GE continues to show a promising future as growth remains firm which was well reflected in the earnings per share which exceeded the Street estimates by a penny standing at $0.56 a share against expectations of $0.55 a share.
The industrial segment performance was solid in the fourth quarter of 2014 and even the oil and gas segment posted an uptick of 1% in profits though it did exhibit around 6% of sales decline that stood a bit hurt due to the falling oil prices which have declined more than 40% from June to December 2014.
Meanwhile, sales in the power and water unit which is GE’s largest contributor to its industrial segment improved 22% year over year and that of the aviation unit increased 4% in the quarter. Fourth quarter net income rose by a whopping 61% driven by the power and aviation business lines to $5.15 billion. Revenue rose 4% to $42 billion from $40.3 billion and it is notable that the industrial unit contributed $31.8 billion to the total revenue of the quarter, showing a 6% increase from the year-ago quarter.
The company has been active in reducing costs to boost their margins which is well apparent on a year-to-year comparison when corporate operating costs has decreased by $953 million from 2013 to 2014. As GE continues on its mission to reduce the pension expenses and overheads it expects to get more efficient by 2016 and that was well highlighted during the investor presentation.
Outlook looks bullish, but CEO maintains a cautious attitude
During the earnings conference last Friday, CEO Jeff Immelt stated- “GE ended the year with strong fourth-quarter industrial earnings and margin growth…” However, he agreed that the current environment was not highly favourable to growth and said – “The environment remains volatile, but we continue to see infrastructure growth opportunities…”
Despite the cautious tone maintained for the oil and gas segment which faced 6% decline in revenue in the fourth quarter and is expected to see severe headwinds in 2015 as well, GE expects the healthcare market in the U.S. to remain encouraging and estimates that the equipment orders could improve tremendously going forward in this sector. Also, as oil prices continue to dip, it gives signal for growth of the aviation line of business which will see rosy days in 2015.
For 2015, GE projects the earnings per share to be around $1.10-$1.20 per share from the industrial segment for the full year and also has highlighted that this segment could grow organically by 2-5% in this fiscal year. Free cash flow is expected to stand at $12-$15 billion at the end of the year and investors ought to rejoice as the company is interested to pay around $9 billion as dividends and return a total of $10-$30 billion to its shareholders by the end of the fiscal year.
As GE looks ahead to split its remaining interest in Synchrony Financial, shareholders are convinced of earning handsome pay-outs as projected by the company during this quarter’s earnings call. If GE is able to return a total of $10-$30 billion through dividends and buybacks as forecasted in 2015, it would stand comparable to the combined total of $11 billion returned to investors in 2014.
Last word
GE looks poised for growth in 2015 when the integration with Alstom, the spinoff of the appliances unit and the spinoff of Synchrony Financial will all get wrapped up by the year end. As depicted by the management, while there are obstacles to further growth, the strategies are there in place to help deliver better top and bottom lines for the current year. This in turn will improve the cash position of the company dramatically and aid in increasing the pay-outs to the investors holding GE’s stock in the long run.
