Once again The General Electric Company (GE, Financial) proved the worth of its strategy to focus on what’s core and move away from what’s not. With renewed focus on its industrial segment, the company seems to be functioning even more effectively and efficiently as it reported a strong set of numbers for the recently concluded third quarter of fiscal 2014. CEO Jeff Immelt during the earnings call said,
“We continue to plan against the global macro backdrop to this volatile and one where some economic projections of recent been revised downwards…we are seeing solid pockets of underlying growth in many of our markets. The good news for us is that we plan for volatile environment, our businesses are executing well, and we are tracking to our expectations for the year.”
Here’s a quick look at the quarter’s performance, what drove such performance and what else is going on at GE.
A look at the numbers
GE gave ample reasons to its investors to sport a smile. The company topped analyst expectations of earnings per share. However, the topline missed expectations marginally, caused by the delay in some gas and wind turbine sales that’s expected to be completed in the coming months. The conglomerate reported EPS of $0.38, translating into a decent 6% increase of prior year period, on a revenue of $36.2 billion, up 1% year on year. Margins for the quarter was up 90 basis points at 16.3%. The following chart gives a breakup of the GE’s consolidated revenues for the three months period.
Source: GE Press Release (Percentages suggest contributions before corporate items/eliminations)
Every business, other than GE Capital, forms the industrial segment of GE. The maximum contribution to the top line came from the Power & Water business that accounted for 17%, closely followed by Aviation at 15%, and then by Oil & Gas at 13%. About a third of the consolidated revenues came from GE Capital.
The industrial segment, as always, pleased the management and the shareholders greatly with segment profits growing 9%, and for 9 months period (year to date) the figure is more impressive at 10%. The quarter also witnessed orders grow by 22%. The company believes its position in the market (speaking relatively) is improving as its business segments, such as aviation, transportation, power and healthcare are gaining share and better traction. The industrial segment’s performance is improving on the back of sustained organic growth and margin expansion. GE expects the segment to grow by at least 10% in the current fiscal, and by 2016 the segment is expected to account for 75% the company’s earnings.
GE Capital’s performance was more of a surprise during the quarter. As pointed out by Jeff Immelt, “For the first time in a while we are seeing volume improving for GE Capital in the US. GE grew margins by 90 basis points.” Even the segment’s dividends were on track for $3 billion for the full year.
GE’s year to date CFOA stood at $7.2 billion, growing by 41% during the third quarter, and the management believes its very well in tune with $14 billion to $17 billion projections for the year. As mentioned in the earning call, even better CFOA generation is expected in the fourth quarter on the back of greater industrial earnings and improved shipments compared to the previous year.
From non-core to core
The quarter was a significant one for GE as it completed the IPO of Synchrony Financial, its North American Retail Finance business. The IPO was launched in July and moving forward this arrangement is expected to shrink GE Capital “dramatically” and reduce the company’s exposure to consumer finance, in line with Jeff Immelt’s 2016 vision. The company also agreed to sale its Appliances & Lighting business to Electrolux for a whopping $3.3 billion. Apart from this, GE is also working on getting approvals to complete its deal with Alstom.
All these moves from the company are small blocks of the bigger plan of repositioning GE as a major player in the infrastructure and technology market with minor exposure to financial services. In the words of the revolutionary CEO, “The GE team has done a good job of both strategic and operational execution. With a big backlog, high levels of recurring revenue and a restructuring program already in place, we believe that GE will deliver for investors in times like these.”
Parting thoughts
The transformation that GE is planning to pull off has come out well so far. The management is positive about the overall developments and expects great synergies from all the restructuring. Though the company missed Wall Street’s expectations for the topline, there’s not much to worry about. The conglomerate’s performance is in tune with the annual guidance it had provided earlier and GE will make up for the lost figures in the fourth quarter.
