This blog is devoted to helping investors make informed decisions. It will be regularly updated and provide opinions on earnings results. It is not intended to give investment advice and should not be taken as such. Consult your investment advisor.
If you think that investing is simple, then just take a look at industrial giant General Electric’s(NYSE: GE)
latest results. The industrial sector has been weaker this year, but GE
reported a surprisingly good set of results. Furthermore, rivals such
as Switzerland’s ABB and Germany’s Siemens,
have subsequently given disappointing results and guidance. So what's
going on with GE? How has it managed to achieve such good results?
The three reasons why the results were good
GE actually reported a 4% decline in revenues, and its earnings from
continuing operations before taxes were down 11%. It may seem peculiar
to describe such results as being "good," but here are three reasons why
the description fits.
First, the industrial side actually increased segment profits by 2%.
The negative contribution came from the financial services side, where
GE Capital’s segmental profits declined 9%. The decline at GE Capital
was in line with the company's strategy to reduce its portfolio size and
focus instead on its core GE business. The days are long gone from when
GE was regarded as a financial services company with an industrial
division attached to it. In fact, the industrial division now generates
double the income of the GE Capital.
Here is a chart (sourced from company accounts) of GE’s segmental income in the quarter:
Five of the six industrial segments increased profits, so the underlying performance is better than it appears at first.
Orders are up
The second reason is that its industrial orders were better in the
quarter. Overall orders were up 4%, with U.S. orders up a whopping 20%,
and its European orders were up 2%, having been down 17% in the previous
quarter. Indeed, industrial bellwether Alcoa(NYSE: AA) highlighted similar dynamics in its latest conference call. Alcoa
implied that North America was strengthening, Europe was
weak-but-stabilizing, and its outlook for China remained the same.
Meanwhile, GE claimed on the conference call that its emerging-market
performance “remained resilient.”
A breakdown of GE’s order growth in the quarter, with all data sourced from company accounts:
Power & water has been the problematic segment this year,
particularly within Europe. Indeed, European power & water orders
were down 40% in the quarter. Excluding Europe, power & water orders
were actually up 6%.
Furthermore, GE claimed that 70% of the segment's shipments would
occur in the second half of the year, which should lead to strong margin
expansion in the second half. This is good news, because the segment is
GE’s biggest industrial profit center.
Relative strength in GE’s key markets
Finally, GE is relatively well-exposed to the growth areas in the
industrial sector in 2013. The relative strength in the aerospace and
automotive sectors has been a recurring theme of investing in the
industrial sector this year.
Indeed, Alcoa noted a similar trend in its recent results.
Alcoa investors should note that, on its conference call, GE discussed
its gas turbine orders, and said that “the overall market is not going
to be quite as strong as we had initially expected.” In contrast, Alcoa left its forecast for industrial gas turbines unchanged.
GE also has heavy profit exposure to other sectors that are
outperforming, such as oil & gas, and transportation. The most
surprising result probably came from its health-care segment.
Healthcare giant Johnson & Johnson(NYSE: JNJ)
has a large medical device and diagnostics division (40% of sales) that
achieved tepid growth of only 0.5% (excluding acquisitions) in the last
quarter. Moreover, Johnson & Johnson described the U.S. hospital
capital expenditure market as being in a recession for the last 10 to 12
quarters.
GE’s healthcare sales told a similar story. Its strong expansion in
growth markets (revenues up 10%) managed to offset weakness in developed
markets (where revenue declined 4%), resulting in flat revenue for the
quarter.
Where next for General Electric?
In conclusion, revenue growth will be hard to generate in 2013 due to
a weak global economy, but GE has enough exposure to the end markets
that are doing relatively better. Conditions could hardly get much worse
for its European power & water operations, and going forward, GE
will start to lap some easier comparables.
The underlying performance on the industrial side is relatively good
for the sector, and GE represents one of the better ways to play the
industrial sector this year. It's well worth looking at.
No comments:
Post a Comment