General Electric (NYSE:GE) posted flat revenues and weaker than anticipated profit growth in some of its industrial segments particularly Power & Water in the first quarter. Results at the company’s Power & Water segment, which incorporates the wind power business, declined due to weak demand for new wind turbine installations. Lately, the slowing wind power capacity additions in China and competition from low natural gas prices in the U.S. has impacted the investments flowing in to the global wind power sector.
On the bright side, GE’s profits from its remaining industrial segments grew by 6% year-over-year on strong growth from aviation, healthcare and transportation. Profits from GE Capital also increased by 9% y-o-y in the first quarter. Orders for the company also increased by 10% y-o-y on strong demand for aircraft engines and oil & gas equipment to take the company’s backlog to an all time high of $216 billion. 
Looking ahead, GE anticipates to post strong growth in its profits in 2013 on support from margin expansion of around 70 basis points. 
We currently have a stock price estimate of $22.16 for GE, just ahead of its current market price.
Mixed Industrial Results
Power & Water Down
GE’s sales at the Power & Water segment declined by 26% year-over-year in the first quarter.  Lower demand for wind turbines from across the world especially Europe impacted the segment’s sales. In the U.S., low prices of natural gas impacted demand and continue to pose a significant threat to long term investments in wind farms.
Lower shipments also reduced the segment’s operating margins to 14.9% in the first quarter, from 18.1% in the year ago period.  These lower operating margins at Power & Water, which constituted 19% of GE’s revenues in 2012, will pose a challenge to the company’s target of improving overall operating margins by 70 basis points in 2013.  However, GE anticipates that performance in this segment will improve during the year with positive year-over-year growth in the second-half of 2013.
Other Industrial Segments – Aviation, Oil & Gas, Healthcare and Transportation Grow
Excluding Power & Water, GE posted moderate growth in sales and profits at its industrial segments. However, orders at some of these segments posted strong growth. At aviation, orders increased by 47% and at oil & gas orders increased by 24% in the first quarter, on a year-over-year basis. 
At aviation, GE’s sales and profits are rising due to increasing demand for new airplanes from airlines around the world. This increasing demand is raising shipment volumes of aircraft engines manufactured by GE. While, at oil & gas, GE’s results are growing due to the increasing global demand for oil/gas driven by the rising energy consumption from the emerging countries. In the oil & gas sector, GE provides primarily oil and gas drilling machinery and equipment.
Overall, the decline in profits at Power & Water segment offset the moderate growth from other industrial segments to lower GE’s industrial profits by 11% year-over-year to $2.9 billion in the first quarter. 
GE Capital Posts Higher Profits And Continues To Re-Balance Portfolio
However, the lower industrial profits were partially offset by higher profits from GE Capital. GE Capital’s profits improved by 9% year-over-year to $1.9 billion in the first quarter on continued recovery in the global financial markets supported by global economic growth.  The company also continued to lower its asset base through removal of non-core assets like real estate. GE Capital’s ending net investment excluding cash, which provides a measure of its assets, declined to $402 billion at the end of the first quarter, from $419 billion at the end of 2012. 
NBCU Transaction Lifts Results
GE also received significant one-time benefits from the sale of its remaining 49% stake in NBC Universal to Comcast for $18.1 billion in February earlier this year. The company’s earnings gained $0.08 per share from this transaction.  GE plans to utilize the cash raised through this divestiture to return approximately $18 billion to shareholders in 2013 through dividends and share buyback. In the first quarter, it returned around $3.9 billion to investors through these two channels. 
The company is also utilizing the cash from the NBCU transaction to accelerate restructuring with an objective to provide some momentum to its margin expansion. Through cost-cutting measures, which include headcount reduction and closure/downsizing of less profitable plants, GE has already reduced its industrial structural costs by $200 million in the first quarter. Overall, the company plans to reduce its industrial structural costs by $1 billion in 2013. 
All in all, the combined effect of lower industrial profits, higher GE Capital profits and one-time gains from the NBCU sale, increased GE’s earnings by 15% year-over-year to $0.39 per share in the first quarter. Notes: