GE’s Revenues Disappoint But Earnings Growth Forecast Maintained

General Electric (NYSE:GE) posted lower than expected revenue growth in its third quarter earnings on Friday, October 19. Revenues were $36.3 billion, up 3% y-o-y in the three months ended September 30. ^[1] The low top line growth was a result of decline in revenues at GE Capital and foreign exchange losses arising out of a stronger dollar. As a result, the company lowered its full year top line growth forecast to 3% from the earlier indicated 5%. This led to a decline of 3.42% in its stock price by the end of trading on the day. ^[2]

However, GE posted impressive profit growth driven by improvement in operating margins at its industrial businesses and growth in net income at GE Capital. Earnings in the third quarter were $0.36 per share, up 13% y-o-y excluding the effect of preferred stock redemption in the third quarter of 2011. ^[1] Energy, Oil & Gas, Transportation, and Home and Business Solutions divisions of the company reported double-digit increase in profits. The increase was driven by strong growth in China, Latin America and Africa, partially offset by decline in Europe. Driven by its impressive earnings performance in the year-to-date period, the company is maintaining its full year double-digit earnings growth forecast, in spite of the weak global economic environment.

We currently have a stock price estimate of $21.77 for the company, marginally below its current market price.

See our complete analysis of GE here

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Growth driven by industrial businesses of GE

Industrial businesses of GE comprising of Energy Infrastructure, Transportation, Aviation and Home & Business Solutions, posted revenues of $24.8 billion, up 6% y-o-y in the third quarter. ^[1] The energy division posted the highest top line growth of 12% followed by the Transportation division’s 9% y-o-y top line growth. ^[3] The growth in the global energy demand, particularly in emerging economies, is driving growth in the global energy sector. GE, which manufactures gas turbines for power generation, wind turbines and a variety of products for energy production, distribution and management is benefiting from this rising demand. Also, with crude oil remaining at high prices that attract investment, the demand for GE’s oil drilling equipment and a variety of products used in the oil and gas industry is remaining high. And, the growth in the transportation division of the company is being boosted by GE’s fuel-efficient locomotive technology that meets EPA’s Tier 4 emission standards.

Healthcare and Aviation divisions posted marginal y-o-y decline in revenues in the third quarter. In the Healthcare division sales in Europe were impacted by declining purchases by European hospitals due to austerity programs. However, profits increased by 7% and 2% in the Aviation and Healthcare divisions, respectively, in the third quarter on a y-o-y basis. Overall profit for the industrial businesses increased 11% y-o-y to $3.6 billion in the third quarter. This impressive growth in the industrial businesses of GE in the third quarter was driven by 24% sales growth in China, 21% sales growth in Latin America and 22% sales growth in Sub-Sahara Africa on a y-o-y basis. ^[3]

Decline in assets of GE Capital impacts top line growth

The top line growth was impacted by decline in revenues at GE Capital. Revenues for the division were $11.4 billion, down 5% y-o-y in the third quarter. ^[1] This decline is a result of the planned reduction in the assets of GE Capital since the financial crisis of 2008-09. Ending Net Investment (ENI), a measure of assets, was lower by $27 billion in the third quarter of 2012, compared to the third quarter of 2011. ^[3] However, the removal of risky assets from the balance sheet of GE Capital has continued to improve its net yield. As a result, profit for the division increased 11% y-o-y to $1.7 billion in the third quarter. GE Capital also returned a dividend of $2.4 billion in the third quarter to GE, taking its year-to-date dividend to $5.4 billion. ((GE 2012 third quarter performance, October 19 2012, www.genewscenter.com))

In addition, foreign exchange losses due to a stronger dollar continued to impact GE’s top line. The company estimates that it incurred $1.1 billion in revenue loss in Q3 on account of foreign currency getting converted to fewer dollars. ((GE Reports 3Q’12 Operating EPS $0.36, October 19 2012, www.genewscenter.com))

Going forward over the rest of 2012, the ongoing reduction in assets of GE Capital and continued strength in the value of dollar will moderate top line growth of GE. However, continued strong performance of its industrial businesses in the emerging economies, will drive strong growth in earnings.

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1. GE Reports 3Q’12 Operating EPS $0.36, October 19 2012, www.genewscenter.com [↩] [↩] [↩] [↩]
2. General Electric Company, www.google.com/finance [↩]
3. GE 2012 third quarter performance, October 19 2012, www.genewscenter.com [↩] [↩] [↩]