In the first quarter of 2015, earnings reported by General Electric Co. (GE, Financial) reflect a 1% drop in its industrial revenue which stood at $24.4 billion. Three of the company’s seven industrial segments – oil and gas machinery manufacturing, jet engine manufacturing and medical devices manufacturing – saw a drop in revenues, while its power-turbine manufacturing business is the only one of the industrial segments that reported a sales increase.
Operating profits in the industrial sector, however, grew by 9% to $3.6 billion and margins were seen to be on an upswing by 26.2%. CEO Jeff Immelt is confident that the company will be able to fulfill the forecasted $1.10 - $1.20 earnings per share promise from industrial shares in the course of the year.
“GE performed well in the first quarter, in an environment that remains volatile but with continued growth opportunities in infrastructure. This was an important quarter for GE. We delivered good first-quarter results in our industrial businesses, with 14% growth in operating EPS. And last week, we announced a new plan to create a simpler, more valuable industrial company by selling most GE Capital assets, a major step in our strategy to focus GE around its competitive advantages. We are reshaping the company.” CEO Jeffrey Immelt said in the company press release.
Moving away from finance
CEO Immelt has placed the company in a precarious position where it is attempting to shed its financial services portfolio to focus on its traditional mainstay of heavy industry. It announced plans to divest GE Capital that holds a massive portfolio of loans, last week. In 2014, it started selling off stake of Synchrony Financial (SYF, Financial) and is poised to sell off the remaining controlling stake by the end of this year.
“We have laid out a clear plan to reshape GE for the future. We will reduce the size of our financial business through the sale of most GE Capital assets over the next 24 months, with the potential to return more than $90 billion to investors in dividends, buyback and the Synchrony exchange through 2018. Our industrial businesses are performing well and we will continue to invest in our competitive advantages built on the GE Store. We will continue to boost margins and returns. This is the plan for the future of GE as a fast-growth, high-tech industrial company,” explained CEO Immelt.
Shares responded positively, by climbing 11%, to the news of the financial services sell-off as important capital assets were tied up in the business in a bid to maintain stricter regulatory capital reserve requirements stipulated of banks.
Competition lessons
Competing manufacturers Honeywell International Inc. (HON, Financial), who make aerospace components, building control and alarm systems and chemicals, also went about ditching financial and banking businesses. The company reported a 5% sales drop while profits, reportedly, rose 11% to $1.12 billion.
Overall, GE posted a loss of $13.6 billion compared to the $3 billion in profit posted in the same quarter of last year. Analysts predict returns from the oil-and-gas business will continue falling with oil prices falling around the world. The company reported a 3% decline in profits and 8% fall in revenue from the sector. Falling crude oil prices have also negatively affected the company’s infrastructure equipment orders from places such as the Middle East, Africa and Russia.
Final word
The emphasis on the industrial segment is clear from the first quarter earnings report and surely there will be more to explore with regard to the financials reported in the upcoming quarters. Let’s keep an eye on how the boldest move of GE to focus more on the industrial segment and divest its stake from the financial arm takes shape in the near future.
