General Electric (NYSE:GE) will announce its fourth-quarter earnings on Friday, January 18. The company is maintaining a double-digit earnings growth forecast for the full year 2012. In the nine months ending September 30, it achieved 12% year-over-year growth in earnings [ 2012 Q3 10-Q, November 7, 2012, www.ge.com]. This was driven by growth in its industrial businesses, particularly energy, oil & gas, transportation and aviation. Additionally, the fast-growing regions of Asia-Pacific, Latin America, North Africa and Middle-East contributed the most to achieving this growth. On the other hand, Europe continued to weigh on growth due to its sovereign debt crisis.
In all, we anticipate GE to post strong earnings growth in the fourth quarter driven by industrial businesses, somewhat offset by the slowdown in Europe. We currently have a stock price estimate of just under $22 for the company, marginally above its current market price.
Energy and Oil & Gas
The growing worldwide demand for energy is raising demand for gas turbines and power generation equipment manufactured by GE. This led to a 11% year-over-year rise in profits at GE’s energy segment in the first three quarters of 2012 [ 2012 Q3 10-Q].
In the oil and gas sector, the consistently high prices of crude oil are ensuring investments in oil and gas drilling. This is raising demand for oil and gas drilling equipment manufactured by GE. This resulted in 18% y-o-y increase in profits for GE’s oil & gas business in the nine months ended September 30, 2012 [ 2012 Q3 10-Q]. Crude oil (Brent) remained above $105 per barrel in the fourth quarter, and thus investment continued to flow into the sector [Brent crude oil prices, January 16, 2013, www.moneyweek.com].
Transportation, Aviation and Healthcare
At GE Transportation, profits increased 47% y-o-y in the nine months ended September 30 [2012 Q3 10-Q]. Growth in this segment is being boosted by GE’s fuel-efficient locomotive technology that meets the Environmental Protection Agency’s (EPA) Tier 4 emission standards.
At GE Aviation, earnings are benefiting from rising passenger traffic and increasing profitability of airlines. The huge backlog of unfilled orders at aircraft manufacturers like Boeing (NYSE:BA) and Airbus is raising the near-term demand for aircraft engines manufactured by the company. GE remains well-positioned with several successful engine lines in its portfolio like CFM’s LEAP series, which powers Boeing 737 series and Airbus A320 family of aircraft. However, the uncertainty over military aviation spending, especially in the U.S., continues to weigh on its outlook.
In the healthcare sector, rising public spending on healthcare in emerging economies is raising demand for PET and CT machines and other medical equipment manufactured by the company. However, lower spending by hospitals in Europe due to austerity measures is impacting sales. Overall, GE’s healthcare profits improved 3% y-o-y in the nine months ended September 30 [2012 Q3 10-Q].
In the fourth quarter of 2012, the continued spending on energy generation and oil and gas drilling, rising orders for commercial aircraft engines and increasing healthcare spending in emerging economies will drive growth in GE’s industrial profits.
GE’s financial business, which constitutes nearly 30% of total company value according to our estimates, is witnessing declining revenue due to the planned reduction in its assets since the financial crisis of 2008-09. In the nine months ended September 30, revenue at GE Capital declined 9% y-o-y [2012 Q3 10-Q]. Over the same period, ending net investment, a measure of assets, declined by $20 billion [2011 10-K, February 24, 2012, www.ge.com] [2012 Q3 10-Q]. However, the removal of risky assets from GE Capital’s balance sheet has continued to improve net yield. Consequently, profits at GE Capital increased 14% y-o-y in the nine months ended September 30. The ongoing focus on improving yields by removing risky assets will continue to grow GE Capital’s profits in the fourth quarter.
Disclosure: No positions