General Electric’s (GE, Financial) industrial segment’s earnings for the first quarter of 2015 rose by 9 percent, cushioning the fall of its oil and gas business due to low crude oil prices. This increase in profit is due to the cost cuts that expanded profit margins. The Connecticut-based U.S. conglomerate manufactures jet engines, turbines and other industrial products as it prepares to lay off its financial lending arm.
General Electric reported a net loss of $13.6 billion or $1.35 per share for the first quarter due to the costs related to the company’s plans to sell its finance business and to focus completely on the industrial business. Excluding special items, the EPS for the quarter stood at $0.31 a share. Let’s dig in deeper to find out the major highlighted numbers of the industrial segment and the withering finance unit of GE.
GE’s business in oil, capital and industrial segments and shift in strategy
GE’s revenue fell by 1 percent to $24.36 billion in the industrial segment due to the $950 million loss from the strengthening dollar, while the sales rose 3 percent. GE shares fell 0.1 percent to $27.26 in morning trading on the NYSE, against larger declines in other U.S. stocks soon after the earnings announcement.
Revenue of General Electric’s oil and gas business was down 8 percent year-over-year to $3.96 billion, while profit fell 3 percent year-over-year to $432 billion. GE said that its oil revenue was flat excluding currency effects and impact from deals. GE’s oil and gas business is still seen with skepticism by analysts and is expected to be weaker in the coming days given the plunge in the crude oil prices.
GE Capital’s revenue fell 39 percent to $5.98 billion resulting in total sales declining 12.5 percent to $29.34 billion in the quarter. In fact, investors strongly feel that the finance arm of GE weighs on the growth of the industrial segment and it was well understood in the dramatic overall revenue slide in the quarter which was majorly due to the revenue loss seen in the financial business segment of GE. In fact, excluding the impact of GE Capital, revenue for the quarter was down 3% to $33.1 billion.
GE now backs on the industrial business. This is a major shift in strategy for General Electric. GE announced last week on April 10 that it would cut back the finance business significantly and also announced it will sell off loans to borrowers like Wendy’s franchises, private equity firms and overseas consumers worth about $165 billion. GE is also set to sell investments in office buildings and other commercial property worth around $26 billion to buyers including Blackstone Group LP (BX, Financial) and Wells Fargo & Co. (WFC, Financial).Â
GE’s industrial operating margins added 1.2 percentage points to 14.6 percent, from a year earlier. This was the result of administrative cost cuts and a better mix of sales from higher-margin services. The orders were down by 3 percent, though it was up slightly on barring the currency effects. General Electric has been reducing its financial unit since the financial crisis in 2008.
General Electric’s shares saw the highest jump in six years last Friday, as the declaration about GE Capital’s divestiture pleased the investors who believe the company’s financial unit was decreasing its value as an industrial company.
Final word
Though there are major headwinds linked to currency fluctuations linked to a strong dollar, GE’s industrial segment is showing brisk growth and that is apparent from the first quarter earnings report of the fiscal year 2015. GE also seems to be on track for operating earnings per share of $1.10-$1.20 in 2015. Going forward, analysts would be exclusively monitoring GE’s industrial side of the business and hopefully the upcoming quarters will show better numbers for the industrial segment.
