General Electric Co. (GE, Financial), a major diversified industrials company, said on April 20 that first-quarter adjusted earnings per share increased 14% year over year, driven by strong growth in four of its business segments. Despite this, the Boston-based company still lags its competitors, which include 3M Co. (MMM, Financial), Honeywell International Inc. (HON, Financial) and Emerson Electric Co. (EMR, Financial).
Brief summary of earnings
CEO Jeff Flannery said the first quarter represents a key step in the company’s execution plan for 2018. Despite the challenging landscape in the Power industry, GE reported higher segment profit margins in its Aviation, Health Care, Renewable Energy and Transportation segments. Table 1 summarizes GE’s segment profit margins in each of the reporting segments.
| Segment | Profit margin, 1Q18 | Profit margin, 1Q17 | Change in profit margin, YoY |
| Power | 3.80% | 5.50% | -1.70% |
| Renewable energy | 4.70% | 4.00% | 0.70% |
| Oil and gas | 3.40% | 8.40% | -5.00% |
| Aviation | 22.50% | 19.10% | 3.40% |
| Health care | 15.60% | 15.40% | 0.20% |
| Transportation | 14.90% | 9.70% | 5.20% |
| Lighting | 0.20% | 2.20% | -2.00% |
Table 1: GE’s segment profit margin for first-quarter 2018 compared to first-quarter 2017
CNBC columnist Michael Sheetz said GE’s earnings report offered “further relief” for the company as the restatement of earnings reflected no significant repercussions to expected full-year earnings. Flannery added that despite recording a reserve of $1.5 billion related to the WMC Financial Institutions Reform, Recovery and Enforcement Act settlements, the company expects no change to its framework for the year.
Company lags competitors in quality
Although the company’s profitability ranks 6 out of 10, GE’s net margin, return on equity and return on assets underperform over 83% of global competitors. GuruFocus tagged GE with two red flags related to margin declines: over the past five years, GE’s operating and gross margins contracted approximately 9.3% per year on average.
Although GE’s operating margin of 9.73% slightly outperforms the industry median of 7.51%, GE’s profit margin underperforms that of 3M, Honeywell and Emerson, as Table 2 illustrates.
| Financial metric | GE | Industry Median | Competitors | ||
| 3M | Honeywell | Emerson | |||
| Price-earnings ratio | #N/A | 25.44 | 27.5 | 71.02 | 28.27 |
| Price-book ratio | 1.99 | 2.71 | 11.22 | 6.47 | 5.32 |
| Price-sales ratio | 1.05 | 1.46 | 4.21 | 2.83 | 2.85 |
| EV to EBITDA ratio | 165.35 | 11.77 | 14.83 | 14.27 | 14.37 |
| Return on equity | -8.53% | 9.22% | 42.93% | 8.40% | 19.64% |
| Operating margin | 9.73% | 7.51% | 22.94% | 17.40% | 17.25% |
Table 2: Comparative analysis of GE relative to industry peers
During the quarter, FPA Crescent Fund manager Steven Romick (Trades, Portfolio) axed his stake in GE as the company offers declining growth potential. Romick sold his 7,649,785 shares for an average price of $15.54 per share.
See also
GuruFocus launched overview pages for each sector and industry as defined by Morningstar Inc. (MORN, Financial). Figure 1 shows a sample screenshot illustrating the industry weighting for Industrial Products.
Figure 1
As mentioned in the new feature announcement, you can click on one of the subheader items to go to that specific section. We are pleased to announce we have added distribution charts in the historical key ratios section. For example, you can view the distribution of operating margins or returns on equity for a specific industry, as Figure 2 illustrates.
Figure 2
You can also screen for companies with above-average margins or returns by clicking the “go to screener” item in the “company comparison” section. The Screener will automatically select the industries within the active industry group.
Disclosure: No positions.
