General Electric (NYSE:GE) will announce its second quarter earnings Friday, July 19. The company’s industrial businesses posted mixed results in the previous quarter, and we anticipate the trend to continue in the second quarter. While GE’s aviation and oil & gas businesses are expected to continue to post strong growth driven by their huge order backlog and high market demand, its power and water segment is expected to remain weak due to low wind turbine shipments. Some of the other GE industrial businesses like healthcare and transportation are expected to post moderate growth driven by rising spending from the emerging markets. Also, in focus this earnings will be GE’s progress on its 2013 target of expanding industrial margins by 70 basis points through cost cuts.
Additionally, GE’s financial business – GE Capital – is expected to continue to get smaller through sell-off of non-core, riskier assets. However, at the same time it is continuing to grow its core mid-market financing business.
In all, we expect GE to post moderate growth in its second quarter earnings. We currently have a stock price estimate of $22 for GE, around 5% below its current market price.
Mixed Industrial Environment
Aviation, Oil & Gas And Healthcare Are Up
Aircraft manufacturers like Boeing (NYSE:BA) and Airbus are increasing their production rates in order to make timely deliveries against their growing order books, which are driven by replacement demand from the developed markets and fresh capacity demand from developing markets. This in turn is growing sales and profits at GE aviation as rising commercial airplane deliveries are increasing the shipments of jet engines manufactured by GE. Through its joint venture – CFM International – with Safran of France, GE’s jet engines power many of the highest selling aircraft models that include the Boeing 737 and Airbus A320.
At GE oil & gas, results are growing due to the increasing global demand for oil/gas driven by rising energy consumption from the emerging countries. GE is a leading player in this market on the strength of its global service network and a diverse oil & gas portfolio that includes oil/gas drilling machines and equipment, sub-sea wellhead systems etc. The company has supported its organic growth in this segment with many acquisitions, the latest of which is the ongoing acquisition of Lufkin Industries. (See GE Broadens Its Oil & Gas Portfolio With Lufkin Acquisition)
At GE healthcare, sales are growing driven by rising healthcare spending from the emerging regions like Asia-Pacific and Latin America. Due to these trends, we anticipate results at GE aviation, oil & gas and healthcare to grow in the second quarter.
Power & Water Is Weak
On the flip side, GE continues to face headwinds in its power and water segment, which sells primarily turbines and generators that harness wind, gas, oil and water resources for power. Results in this segment have been impacted from the weak global demand for new wind turbine installations. The economic downturn in Europe and the boom in shale gas production in the U.S. have impacted investment flowing in the wind power sector and slashing demand for new wind turbines.
In 2012, the power and water segment generated around $28 billion of the $147 billion revenues of GE.  In the first quarter, revenues from this segment declined 26% year-over-year to neutralize the top line growth from all other GE industrial businesses and GE Capital. 
Industrial Margin Expansion
On the margin front, it will be interesting to see the progress that GE has made in the second quarter on its 2013 goal of industrial margin expansion of 70 basis points. In the first quarter, GE reduced its industrial structural costs by $200 million, and for the full year 2013, it targets lowering its industrial structural costs by $1 billion.  The company is lowering its costs through multiple channels that include removing excessive ERP systems, cutting headcount as well as around 20% of the structural costs from Europe. 
Smaller And More Profitable GE Capital
At GE Capital, we anticipate profits to improve in the second quarter on the continued recovery in the financial markets supported by global economic growth. At the same time, GE is expected to continue to slim the size of its financial business. During the first quarter, GE Capital slashed its ending net investment excluding cash, which provides a measure of its assets, by $17 billion to $402 billion at the end of the quarter.  The company targets to reduce this to around $300-$350 billion by the end of 2014 by selling-off non-core, riskier assets. 
Cash from this sell-off will help GE achieve its planned return of $18 billion to shareholders in 2013, through dividends and share buyback. In the first quarter, the company had returned around $3.9 billion to shareholders through these two channels. Notes: