GE Shares Inch Higher On Improving Outlook

General Electric (NYSE:GE) delivered encouraging earnings last week and its shares have inched a few percent higher on the better outlook for the company as business improves. The company’s industrial businesses was a bright spot which has grown both organically and through acquisitions in select niches. GE Capital continues to chart cautious growth while eliminating risky assets from its balance sheet and subjecting itself to more regulatory oversights. GE competes with other industrial conglomerates like United Technologies Corporation (NYSE:UTX) and 3M (NYSE:MMM) among others. We currently have a price estimate of $20 for GE, which is slightly above the market price.

See our full analysis of the General Electric stock here

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Strong growth in industrial businesses

GE showed the highest growth in the industrial segment since the financial crisis of 2008. The overall revenue growth for this business was 14% and 11% organic y-o-y. It is also worth noting that while revenues in growth markets grew at 14%, some of the developed markets showed far greater growth with Germany and Japan reporting revenue increases of 35% and 59% respectively.

The growth was also well distributed in both equipment and services sector. GE was particularly helped by the demand in big-ticket manufactured goods like jet engines, railway locomotives, power generators and medical-imaging equipment. Wind turbines which has been a sore spot for the company in the past few years has promise this quarter on the back of federal tax credits which expire this year. However, there were weak spots for the company in Europe and appliances business. A struggling housing market has drawn down the profits of industrial appliances by almost 11% while medical imaging market continued to do poorly in Europe. ^[1]

The profit of the industrial segment grew by almost 10%. While energy and healthcare earnings grew at this rate, transportation was an outperformer with earnings growth of 48%. A remarkable feature of this quarter was the strong order backlog which GE built in the industrial sector. The order backlog which the company garnered in this quarter stood at $23.1B, a growth of 20% over the prior year quarter. Equipment orders grew by 29% while services order grew by 11%.

GE Capital continues to improve

GE Capital continued disposing its risky assets and consolidating the balance sheet. The company has managed to reduce its tier 1 common ratio ( ratio of capital to risky assets ) to nearly 10.4%. The company has a cash stash of around $76 billion while its non earnings assets decreased by almost $300 million. Earnings of GE Capital stayed flat at $1.8 billion. However, they were up 27% if the impact of Grangu sale is taken out.

GE is hoping that seeing the healthy position of its finance company. The Fed might soon allow GE Capital to contribute a significant chunk of its earnings to the parent company. Before the financial crisis, GE Capital used to account for nearly half of the GE’s earnings. However, after the financial crisis, the Fed has started regulating GE Capital like a bank, drying up most of the inflows to GE. Hence, GE Capital’s improved performance in this quarter will boost GE’s hope of accessing extra funds will be used to increase dividends to shareholders, buy back shares and perhaps make a few small, niche acquisitions.

GE Capital’s real estate business also turned profitable for the first time since the financial crisis. Real Estate accounts for nearly 2.2% of GE’s value. We expect GE’s return on the real estate portfolio to reach approximately 7% by the end of the Trefis forecast period.

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1. General Electrics Press Release [↩]