GE Earnings Preview: Industrials Businesses To Drive Growth

by Trefis Team
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General Electric
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    Quick Take 

  • GE’s industrial businesses, particularly its oil & gas, aviation and healthcare, are experiencing rising sales due to growth in their respective markets.
  • The company’s cost-cutting measures that include downsizing/closure of non-profitable plants will help it achieve its  double-digit earnings growth target in 2013.
  • Cash from the recent divestiture of GE’s remaining 49% stake in NBC Universal will help return more cash to shareholders in 2013 through an accelerated share buyback program.

General Electric (NYSE:GE) will announce its first quarter earnings on Friday, April 19. The conglomerate will likely post strong growth in top-line driven by its industrial segments, particularly oil & gas, aviation, energy and healthcare. Further, the company anticipates to support its top-line growth with margin expansion to grow its earnings by double digits in 2013. [1]

GE will also see a hike in cash holdings from the recent sale of its remaining 49% stake in NBC Universal (NBCU), as well as the NBCU occupied floors at 30 Rockefeller Center, to Comcast for $18.1 billion. [2] The company plans to use a significant portion of the cash generated from this sale to accelerate its share buyback program and increase its dividend payout. GE’s board recently increased the company’s share buyback program by $10 billion and anticipates to return this amount to shareholders this year. Further, the company plans to pay dividends of around $8 billion in 2013, although the exact dividend payout will depend on earnings growth. [1]

We currently have a stock price estimate of $23.40 for GE, marginally above its current market price.

See our complete analysis of GE here

Growth In GE’s Industrial Segment

Last quarter all of GE’s industrial businesses had posted positive earnings growth with five out of seven segments reporting double-digit earnings growth. We anticipate this trend to continue in the first quarter due to the ongoing growth in key markets of these industrial businesses.

Oil & Gas

The growing global demand for oil and gas driven by the rapidly rising energy consumption levels of emerging countries is increasing the demand for oil and gas drilling machinery and equipment manufactured by GE. The company has actively supported organic growth in its oil & gas segment with strategic acquisitions like Wellstream, the Well Support division of John Wood Group, Dresser and the ongoing acquisition of Lufkin Industries. During 2009-12, GE’s oil & gas segment revenues increased by 57%, from $9.7 billion in 2009 to $15.2 billion in 2012, and its profits increased by 26%, from $1.5 billion in 2009 to nearly $2 billion in 2012. [3] [4]

Aviation

GE is one of the leading aircraft engine manufacturers in the world. The rising global demand for air travel is driving growth in demand for new airplanes from airlines. In 2013, we estimate aircraft manufacturers like Boeing (NYSE:BA), Airbus, Bombardier and Embraer to deliver over 1,400 commercial airplanes to airlines, up from around 1,350 in 2012. GE aviation, whose engines power many of the leading airplanes including the Boeing 737 and the Airbus A320, will likely witness an increase in sales.

Healthcare

GE provides medical imaging, diagnostics and patient monitoring systems in the healthcare domain. Increasing healthcare spending from emerging countries driven by rising income levels is boosting GE’s product sales. However, this growth is being partially offset by the austerity measures adopted by several hospitals in Europe, which is reeling under the sovereign debt crisis.

In addition, the growth in top line provided by oil & gas, aviation, healthcare and other industrial segments is being supported by cost reductions to achieve higher earnings growth. GE anticipates to improve its margins by 70 basis points in 2013 through restructuring, which includes headcount reductions and downsizing/closure of non-profitable plants. [1]

GE Capital’s Portfolio Re-balancing And Improving Profits

The restructuring also involves GE Capital’s accelerated exit from non-core assets like real estate. GE Capital has been focused on removal of risky assets from its portfolio since the financial crisis and accordingly its ending net investment – a measure of assets – declined from $513 billion at the end of 2009 to $419 billion at the end of 2012. [2] At the same time, the continued stabilization of financial markets supported by the recovery in the global economy has contributed to lower losses and improved profits at GE Capital. We anticipate these positive trends at GE Capital to continue in the first quarter.

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Notes:
  1. GE’s webcast presentation, February 13 2013, www.ge,com [] [] []
  2. GE’s 2012 10-K, February 26 2013, www.ge.com [] []
  3. 2011 10-K, February 24 2012, www.ge.com []
  4. Form 8-K, January 18 2013, www.ge.com []
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