GE’s Margin Expansion Momentum Driven By Cost Cuts Will Lift Its Fourth Quarter Profits

General Electric (NYSE:GE) will announce its fourth quarter earnings Friday, January 17. The conglomerate will likely post strong growth in its profits on industrial margin expansion driven by cost cuts. We figure that gains from these cost cutbacks will be supported by high growth at many of GE’s industrial segments including aviation, oil & gas, lighting and healthcare driven by sector specific trends. On the flip side, the company’s top line growth will likely be impacted by lower revenues from GE Capital driven by its smaller asset base. Overall, we expect GE to post a strong fourth quarter.

We currently have a stock price estimate of $26.67 for GE, marginally below its current market price.

See our complete analysis of GE here

Industrial Margin Expansion On Track To Meet 2013 Target Of 70 Basis Points

In the fourth quarter, GE continued with its cost reduction initiatives which included removal of excess ERP systems and headcount reductions. The company also continued consolidating its production facilities which allows for greater sharing of common resources to lower administrative costs. Additionally, GE maintained focus on removing significant structural costs from Europe, where its returns have been impacted due to slowdown. We figure that through these measures GE will achieve its 2013 industrial margin expansion target of 70 basis points. In the first three quarters of 2013, the company expanded its industrial margins by 40 basis annually on gains from these measures. ^[1]

We figure this industrial cost reduction strategy helps GE not only post profit growth in the current environment, where top line growth is constrained by macro challenges such as the European slowdown, but also prepare its industrial businesses to bear greater responsibility in driving future profits as it cuts the size of its financial business – GE Capital.

Sector Specific Growth Trends Will Lift Industrial Results

Additionally, GE’s fourth quarter results will be supported by ongoing growth at many of its industrial segments. For example, at Oil & Gas segment, where GE is a major provider of oil/gas drilling machinery and equipment, the company is benefiting from the ongoing strong growth in the sector driven by rising demand for oil & gas from the emerging countries. These fast-growing emerging countries are also lifting results at GE’s Healthcare segment, where it provides CT/PET scanners, X-ray machines and other diagnostics. At GE’s aviation segment, higher production rates at aircraft manufacturers like Boeing (NYSE:BA) and Airbus, driven by their growing order backlogs, are increasing shipment volumes of aircraft engines and parts. However, this growth at GE aviation from commercial aviation is getting offset in part by reduced military aviation spending. At the appliances and lighting segment, rising global adoption of energy-efficient lighting is continuing to boost sales of GE’s LED lighting products. At the same time, continued recovery in U.S. housing starts is supporting sales growth in GE’s appliance and lighting products. We figure these sector specific growth trends supported GE’s fourth quarter results.

GE Capital’s Smaller Size Will Provide Lower Revenues

Separately, as was previously the case, GE’s top line in the fourth quarter was impacted by lower revenues from its financial arm, GE Capital. GE is continuing to reduce the size of its financial arm by exiting from non-core assets, while growing focus on core mid-market financing. At the end of the third quarter, GE Capital’s ending net investment (ENI), which provides a measure of its asset size, was around $385 billion, down from $419 billion at the start of 2013. ^{[2] [3]} The company plans to finally reduce the size of its financial arm to $300-350 billion ENI by the end of 2014. In turn, this contracting asset base is generating lower revenues, which will impact fourth quarter top line.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. GE’s 2013 Q3 earnings presentation, October 18 2013, www.ge.com [↩]
2. GE’s 2013 Q3 earnings form 8-K, October 18 2013, www.ge.com [↩]
3. GE’s first quarter earnings SEC filing-Form 8-K, April 19 2013, www.ge.com [↩]