Industrial Businesses Drive GE’s Earnings And Outlook

by Trefis Team
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General Electric
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General Electric (NYSE:GE) posted impressive earnings growth in the fourth quarter despite a mixed global economic environment. The industrials segment market earnings for the company driven by China, Latin America, Russia, Australia, New Zealand and ASEAN (Association of Southeast Asian Nations) saw 11% growth on a year-over-year basis to $0.41 per diluted share. [1]

All industrial businesses of GE reported positive earnings growth with five out of seven reporting double-digit earnings growth. The financial business, GE Capital also performed well, reporting 9% y-o-y growth in profits. Such strong performance in the fourth quarter helped GE post 12% y-o-y growth in its earnings for full year 2012. The company ended the year with a backlog of $210 billion, the highest ever in its history. [1]

Energy And Oil & Gas

GE posted year-over-year profit growth of 6% in its energy segment and 14% in its oil & gas segment, in the fourth quarter. [1] The company is benefiting from the growing worldwide demand for energy, which is raising demand for its gas and wind turbines, power generation equipment and oil drilling machinery.

During the quarter, these segments received orders from Petrobras for turbomachinery worth $0.4 billion from Chevron for subsea production equipment worth $200 million and from Renova Energia in Brazil, for 230 wind turbines worth $0.4 billion.

Aviation And Transportation

In the Aviation segment, the company posted 22% y-o-y growth in profits in the fourth quarter. [1] The high order backlog at aircraft manufacturers like Boeing (NYSE:BA) and Airbus is raising demand for jet engines and other aviation parts produced by GE. During the quarter, CFM International (a 50/50 joint venture of GE and Snecma of France), received an order from Alaska Airlines for CFM engines to power their 50 new Boeing 737 aircraft. Also during the quarter, GE announced the acquisition of the aviation business of Avio S.p.A., an Italy-based manufacturer of aviation propulsion systems. This acquisition would consolidate GE Aviation’s supply chain and increase its participation in the global commercial aviation industry.

Over the long term, sales and profits at GE Aviation are expected to rise driven by the commercial aviation industry. Replacement demand from airlines in North America and Europe and additional capacity demand from airlines in Asia-Pacific is driving growth in the global commercial aviation industry. Boeing currently forecasts demand of 34,000 commercial airplanes worth $4.5 trillion over the next 20 years. [2]

At GE Transportation, profits grew 12% y-o-y in the fourth quarter. [1] During the year, the segment introduced its most fuel efficient locomotive, the Tier 4 Evolution series, which meets the strict U.S. emission standards. The launch of this series is expected to add growth to GE Transportation over the coming years.

GE Capital

The financial business of GE also continued to post higher profits despite reduction in its size. Ending net investments (ENI), a measure of assets, declined $26 billion y-o-y to $419 billion at the end of 2012, and full-year profits increased 12% y-o-y to $7.4 billion. [3] [1] The company has been focused on removing risky assets from GE Capital’s balance sheet since the financial crisis of 2008-09. As a result, net yield of assets has improved, which has boosted profits.

GE Capital paid $6.4 billion in dividends to its parent (GE) in 2012, and GE in turn, driven by growth in both industrial and financial business, raised its dividend payment to shareholders by 12% to $0.19 per share. [1] For 2013, the company again targets double-digit earnings growth.

We currently have a stock price estimate $21.78 for the company, marginally below its current market price. We are in the process of incorporating fourth quarter earning results and shall update our analysis shortly.

See our complete analysis of GE here

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Notes:
  1. Form 8-K, January 18 2013, www.ge.com [] [] [] [] [] [] []
  2. Boeing’s current market outlook 2012-2031, January 21 2013, www.boeing.com []
  3. 2011 10-K, February 24 2012, www.ge.com []
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