Aviation And Oil & Gas Lift GE’s Net As Its Portfolio Shifts Towards Core Infrastructure

-15.37%
Downside
170
Market
144
Trefis
GE: General Electric logo
GE
General Electric

General Electric (NYSE:GE) posted healthy growth in its third quarter results as higher airplane engine deliveries and oil & gas equipment shipments outweighed lower earnings from a smaller GE Capital. The industrial conglomerate’s top line rose by 1% annually to $36.2 billion as 3% year-over-year revenue growth from its industrial segment was partially offset by a 1% year–over-year revenue decline from its financial arm, GE Capital. [1] Revenue from GE Capital fell as GE continued to sell non-core assets of GE Capital, resulting in lower revenue from a smaller asset base. The company is currently trying to increase focus on its core infrastructure industrial businesses, and accordingly it is reducing the size of GE Capital. GE’s third quarter profit rose by 6% annually to $3.5 billion as gains from cost cutbacks expanded its industrial operating margin to 16.3%. [2] All in all, with these third quarter results, we figure that GE is on path to achieve its 2014 targets for revenue and profit growth.

At the start of 2014, GE set targets of 4-7% industrial organic sales growth and 10% industrial profit growth. Through the first nine months of this year, the company has been able to grow its industrial organic sales by 6% annually and its industrial profit by 10% annually. [2] So, GE remains on track to achieve its annual revenue and profit growth targets. Additionally, with GE’s backlog rising to a record $250 billion in the third quarter, we figure the company is well positioned to maintain its growth momentum in the fourth quarter of 2014. [2]

We currently have a stock price estimate of $28.33 for GE, approximately 15% ahead of its current market price. We are in the process of incorporating GE’s third quarter results and shall update our analysis shortly.

Relevant Articles
  1. What’s Next For General Electric Stock After 70% Gains In A Year?
  2. Down 20% This Year Is RTX Stock A Better Pick Than General Electric?
  3. Should You Pick General Electric Stock At $110 After A Solid Q3?
  4. After An 18% Top-Line Growth In Q2 Will General Electric Stock Deliver Another Strong Quarter?
  5. Is General Electric Stock A Better Pick Over Its Sector Peer?
  6. Will General Electric Stock Rise Post Q4?

See our complete analysis of GE here

Aviation And Oil & Gas Segments Drove GE’s Third Quarter Revenue Growth

In the third quarter, GE’s revenue growth was driven by its aviation and oil & gas segments, which together constitute nearly 40% of the company’s total industrial revenue. In aviation, as airplane makers such as Boeing (NYSE:BA) and Airbus hiked their production rates in response to the growing global demand for new airplanes, shipments of jet engines manufactured by GE rose. At the same time, GE Aviation’s revenue from jet engine servicing also rose driven by an expanding worldwide fleet of commercial airplanes. In the oil & gas segment, with rising demand for energy from the emerging countries, sale of GE’s oil & gas drilling equipment increased. Driven by these trends, revenue from GE’s aviation and oil & gas segments rose by 6% and 7%, respectively, in the third quarter. [1] This strong growth from aviation and oil & gas segments was supported by moderate revenue growth from other GE industrial businesses including healthcare.

Cost Cutbacks Boosted GE’s Profit Growth

The industrial conglomerate derived additional gains from cost cutbacks in the third quarter. In the first half of this year, the company took out $382 million from its structural costs through various measures, which included headcount reduction, plant consolidation and removal of excess enterprise resource planning (ERP) systems. [3] In the third quarter, as these measures continued, the company was able to further slash its structural costs by $292 million. With this, GE has taken out $674 million from its structural costs in the first three quarters of 2014. [1] For the full year, the company plans to remove about $1 billion from its structural costs, so GE has a significant cost-out left to achieve in the fourth quarter. The company expressed confidence during its third quarter earnings presentation that it will be able to achieve this target. We figure profit growth driven by this cost reduction is crucial for GE as the current global economic environment is not allowing strong revenue growth. This was also evident from the company’s third quarter results, in which cost cutbacks enabled GE’s industrial profit to rise by 9% annually, despite just 3% year-over-year growth in its industrial revenue.

GE Capital Weighs On Growth Due To Its Declining Asset Size

The solid performance from GE’s industrial businesses was partially offset by lower revenue and profits from its finance segment. GE Capital’s third quarter revenue and profit fell due to its declining asset base. The segment has been selling its non-core assets such as real estate, and instead focusing on its core financing business, which includes financing mid-market customers (extending loans to customers that generally do not get a lot of attention from big banks) and extending loans in sectors like aviation and energy where GE possesses deep domain knowledge. Due to these ongoing divestiture of non-core assets, by the end of the third quarter, GE Capital’s Ending Net Investment (ENI), which provides a measure of its asset size, fell by 5% annually to $365 billion. [1] In turn, this lower asset base yielded lower loan and lease revenue.

However, from a long-term perspective, we figure this a good strategy as it will reduce GE’s vulnerability to future shocks in global financial markets. During the 2008-09 crisis, at which time GE was generating more than half of its total earnings from its financing arm, GE’s stock price fell to single digits and the company was forced to slash its dividend due to the sudden meltdown in global financial markets. Ever since, the company has focused on expanding the share of its industrial businesses in its overall earnings.

Portfolio Changes Will Enable GE To Increase Focus On Its Strengths

During the third quarter, GE also executed many changes in its product portfolio. In July, the company launched the IPO of its North American retail financing business, Synchrony Financial, in a planned staged exit from that business. Thereafter in September, the company decided to sell its appliances business to Electrolux for $3.3 billion. Prior to these two developments, GE obtained approvals from Alstom’s board and the French government to purchase power and grid businesses of that company. As a result of all these major portfolio changes, GE will likely generate about 75% of its earnings from its industrial businesses by 2016, up from about 60% currently. At a strategic level, we figure these portfolio changes will make GE more focused on its strengths – core infrastructure and related technology.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. GE’s 2014 Q3 earnings form 8-K, October 17 2014, www.ge.com [] [] [] []
  2. GE’s 2014 Q3 earnings presentation, October 17 2014, www.ge.com [] [] []
  3. GE’s 2014 Q2 earnings form 8-K, July 18 2014, www.ge.com []