Strong Industrial Performance at GE Boosts EPS to Beat Analysts Estimates

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General Electric

General Electric (NYSE:GE) announced its first quarter earnings for fiscal 2015 on April 17th. Overall, the company reported modest performance, given the volatile economic environment. This performance was primarily driven by growth in the industrial division, as GE Capital continues to shrink. Total industrial profit rose 9% and earnings per share grew by an impressive 14% for the quarter on a year-over-year basis. Within the industrial division, 5 out of 7 segments reported growth in earnings. Oil and gas continued to remain a drag on overall industrial revenues, with crude oil prices not showing recovery over the quarter. The segment witnessed an 8% fall in revenues. [1] However, the drop in profits was limited to 3% due to various cost-cutting initiatives implemented by the company.

GE Capital is progressively becoming smaller as GE restructures its portfolio to become an industrially-focused company. The impact of this restructuring was visible in the quarter’s overall performance. Total revenues at GE were down 3% in the quarter, driven by a 7% decrease in revenues at GE Capital. Operating earnings per share were down 6%, driven by a 21% fall in GE Capital earnings per share. [2] The impact of the decrease in GE Capital’s earnings per share was partially offset by the 14% increase in industrial earnings per share.

Overall, even as revenues fell short of analysts expectations, earnings beat analysts’ estimates by a penny a share. [3]

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We currently have a price estimate of about $28 for GE, around 3% ahead of its current market price.

See our complete analysis of GE here

Earnings Growth in Aviation, Transportation and Healthcare Responsible for Overall Industrial Growth

The aviation sector showed robust growth in Q1 2015 as oil prices continued to remain low through the quarter. Orders at GE’s aviation segment were up 36% in the quarter, driven by over 2x growth of 64%  in commercial engine orders on a year-over-year basis. Revenues witnessed a slight decline of 2%, primarily driven by lower military equipment revenue and fewer shipments of the GEnx commercial engine shipments. [2] The decline in GEnx shipments was attributable to certain supply-chain disruptions and the delayed units are expected to be shipped out in Q2 2015 as these disruptions have been remediated. Despite the fall in revenues, overall segment profits increased by an impressive 18%, partially supported by the lower costs incurred due to fewer GEnx shipments. [1]

In 2014, GE took 1,355 locomotive orders positioning itself for record shipments in 2015. [4] The impact of this was visible in Q1 2015 as the transportation segment witnessed a 7% increase in revenues and a significant 11% increase in profits. [1] Transportation orders in the quarter were down 38% on a year-over-year basis. However, this should not be a point of concern to investors as it was primarily due to a large South Africa locomotive deal in Q1 2014 that was not repeated in Q1 2015. The division continues to have a strong backlog with 1,200 locomotive orders at the end of the quarter, half of which is expected to be shipped out through the remainder of this year. ((General Electric’s (GE) CEO Jeff Immelt on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha))

The healthcare segment witnessed a 1% fall in orders taking into account the impact of foreign exchange. Organically, the segment saw a 4% rise in orders in Q1 fiscal 2015. Total segment revenues were down 3%, but up 2% excluding the impact of foreign exchange effects. [2] The segment saw a 3% increase in profit, driven by cost-controlling initiatives undertaken by the segment. [1] The company expects to witness earnings growth in this segment through the year driven by orders growth from China, and with strong cost-controlling initiatives in place.

The oil and gas segment was a drag on overall industrial segment revenues and profit. The segment show deteriorated revenues and profits with crude oil prices showing no substantial recovery through the quarter. However, the company continues to limit bottom-line impact of the industry slowdown by taking up headcount reduction and proactive restructuring decisions to keep costs low.

Growth from aviation, transportation and healthcare raised GE’s overall backlog to a record $263 billion at the end of Q1 2015. [1] Strength from aviation, transportation and healthcare segments gives us confidence that GE will continue to grow its results through 2015, despite weakness in its oil and gas business. At the end of Q1 2015, the company is on track to achieve its target of $1.10-$1.20 for industrial earnings per share. [5]

Smaller GE Capital Slowed Down Overall Growth

Growth driven by industrial segments was tempered by falling revenue and profit from GE’s financial arm, GE Capital. In the three months ended March 31, 2015, revenue from GE Capital fell by 39%. [1] This is because GE is steadily reducing the size of GE Capital to become an industrially-focused company. One of the impacts of reducing GE Capital will be losing out on significant tax breaks. GE Capital has helped GE lower its effective tax rate in the past. While in 2014 GE’s effective tax rate was around 10%, it moved up to 23% in Q1 fiscal 2015. [6] [2] This should not be a concern for investors, however, as it is in line with other industrial companies. From a long-term perspective, we figure a smaller GE Capital is good for GE, as it will reduce GE’s vulnerability to future shocks to the global financial market.

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Notes:
  1. GE 1Q 2015 Earnings, General Electric [] [] [] [] [] []
  2. General Electric’s (GE) CEO Jeff Immelt on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha [] [] [] []
  3. GE’s Q1 industrial performance ‘impressive’: Analyst, CNBC []
  4. GE’s 2014 Q4 earnings transcript, General Electric []
  5. General Electric’s (GE) CEO Jeff Immelt on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha []
  6. Price of Selling GE Capital? TaxBreaks, Wall Street Journal []