GE Shows Higher Industrial Margins Driven By Cost Cuts

by Trefis Team
General Electric
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    Quick Take
  • In the third quarter, GE grew its segment profits by 12% annually driven by cost cuts at its industrial segments.
  • Buoyed by the results, the company reaffirmed its commitment of expanding industrial margins by 70 basis points in 2013 from 2012 levels.
  • Strong order inflows during the quarter also lifted the company’s backlog to an all time high of $229 billion.

General Electric‘s (NYSE:GE) top line fell by 1% year-over-year in the third quarter due to lower revenues from GE Capital driven by its smaller asset base. The industrial conglomerate’s earnings also fell 3% annually to 32 cents a share due to restructuring and other one-time charges including those related to the acquisition of Avio, which was completed during the quarter.

Excluding the impact of special items, GE’s segment profits jumped 12% in the third quarter, compared to the same period last year. [1] This sharp rise in the company’s core operating profits was driven by cost-cutting measures at its industrial segments and higher profits from GE Capital. The company also saw its orders rise in the third quarter taking its backlog to an all time high of $229 billion. [2] Looking ahead, we figure that driven by this high backlog and lower cost structures GE will likely post strong results in the coming quarters.

We currently have a stock price estimate of $24.56 for GE, marginally below its current market price. We are in the process of incorporating third quarter earnings and shall update our analysis shortly.

See our complete analysis of GE here

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

GE reduced its industrial structural costs by over $500 million in the third quarter, taking the total reduction in its industrial structural costs in the first nine months of 2013 to $1 billion. [3] [1] The company achieved these cost reductions through employee layoffs and removal of excessive ERP systems among other measures. It also focused on eliminating significant structural costs from Europe where its returns have been impacted from slowdown. In all, as a result of these measures, GE’s industrial margins expanded by 120 basis points year-over-year in the third quarter, and by nearly 40 basis points year-over-year in the first nine months of 2013. Thus, the company remains firmly on track to achieve its 2013 target of expanding industrial margins by 70 basis points from 2012. [2]

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.

Smaller But More Profitable GE Capital

GE also continued to reduce the size of its financial arm – GE Capital – in the third quarter by exiting from non-core, riskier businesses while growing its core mid-market financing business. GE Capital ended the third quarter with an ending net investment (ENI) of $385 billion, down from $391 billion at the end of the second quarter. [3] [1] ENI excludes cash and provides a measure of GE Capital’s size. GE eventually targets to reduce GE Capital to an ENI of $300-$350 billion by the end of 2014. [4] See here to read in greater detail about GE’s strategy behind creating a smaller, but more profitable and stable GE Capital.

In addition, GE Capital’s profits jumped 13% annually to $1.9 billion in the third quarter driven by exits from riskier assets and supported by the continued recovery in the global financial markets. [1]

During the quarter, GE also closed on its acquisitions of Lufkin, a leading provider of artificial lift technologies for the oil & gas industry, and Avio, an Italian aviation component manufacturer.

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  1. GE’s 2013 Q3 earnings form 8-K, October 18 2013, [] [] [] []
  2. GE’s 2013 Q3 earnings presentation, October 18 2013, [] []
  3. GE’s Q2 2013 earnings form 8-K, July 19 2013, [] []
  4. GE Capital at Bernstein strategic decisions conference, May 31 2013, []
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