G.E. Posts Strong Growth In Its Industrial Businesses
General Electric delivered solid sales growth and improving profits in its industrial businesses during the first quarter of 2014.
The results provide evidence that the giant conglomerate’s strategy of relying more on its industrial business and less on finance is on track, even as that strategy puts pressure on the company’s profit and revenue growth over all.
G.E. reported first-quarter net profit of $3 billion, down about 15 percent from the period a year earlier, when it posted profit of $3.5 billion. The company’s operating earnings per share fell 15 percent, to 33 cents a share, from 39 cents in the first quarter of 2013.
The performance was slightly above the average estimate of Wall Street analysts of 32 cents a share, as compiled by Thomson Reuters. The 2013 results were helped by the contribution from NBCUniversal, in which G.E. still held a stake at the time, before the sale to Comcast was complete. Excluding NBCUniversal and one-time charges for discontinued operations, G.E. said its operating earnings a share rose 9 percent in the quarter.
G.E. reported that revenue fell 2 percent, to $34.2 billion, from $34.9 billion in the period a year earlier, slightly below analysts’ forecasts of $34.4 billion.
But G.E.’s industrial revenue grew 8 percent, and profit from the industrial units rose 12 percent, as margins improved. Its sales of oil and gas equipment, jet engines and gas and wind turbines were particularly strong.
In a conference call with analysts, Jeffrey R. Immelt, G.E.’s chief executive, said, “We feel really good about our progress on the industrial side.”
The company’s shares closed the day up 44 cents, or 1.7 percent, at $26.56.
The revenue split in the quarter between the industrial business and the company’s big finance arm reflects the path G.E.’s management has pursued in recent years. While industrial sales rose 8 percent, revenue for GE Capital declined by 8 percent.
Before the 2008 financial crisis, GE Capital routinely accounted for more than half the conglomerate’s earnings. G.E. has said it wants to trim the share of overall earnings from the finance unit to 30 percent by 2016, from about 45 percent last year.
A big step in the strategy should come later this year, when G.E. plans to spin off its North American consumer finance business in an initial public offering. That business, called Synchrony Financial, has estimated profits of about $2 billion a year. As a separate company, it could have a value of $18 billion to $22 billion, according to Bernstein Research.
The solid growth in industrial sales and improved profit margins, analysts say, is encouraging. “Progress there is crucial to make up for the trimming back of the finance side,” said Nicholas Heymann, an analyst at William Blair & Company.
The finance unit is solidly profitable. In the quarter, GE Capital had pretax profits of more than $2.1 billion on revenue of $10.5 billion. And the company will retain a slimmed-down finance business, even after the Synchrony spinoff, though it will largely focus on providing financing to customers who are buying G.E.’s industrial equipment like jet engines and power generators.
G.E.’s smaller industrial divisions — health care, transportation and appliances — reported declines in sales. For example, sales of health care equipment, including medical imaging machines, fell by 2 percent, to $4.2 billion. In the United States, Mr. Immelt noted, there is uncertainty about how health care reform will affect the structure of the industry and patient demand. So hospitals and clinics are holding back on spending for equipment until the outlook becomes clearer.
New orders for G.E.’s industrial equipment placed in the quarter were down by 8 percent from the year-earlier period. Yet orders for large capital equipment, G.E. executives say, tends to be uneven from one quarter to the next. Its total backlog of orders for equipment and services at the end of the first quarter was $245 billion, up from $216 billion a year earlier, suggesting the longer-term trend is positive.
The industrial business, analysts say, is performing according to G.E.’s plan of achieving solid growth while cutting costs to improve profit. “The commitments G.E. has made for its industrial business are playing out,” said Steven Winoker, an analyst at Bernstein Research.
G.E. also plans to improve profitability of the industrial business by fine-tuning the portfolio, selling some operations and buying others. For G.E., a company with $150 billion in yearly revenue, the transactions would be modest. Purchases, Mr. Immelt said, would typically be in the $1 billion to $4 billion range. Sell-offs, he noted, would also range up to $4 billion. Both the buying and selling, Mr. Immelt said, would be to streamline and strengthen G.E.’s current industrial businesses.