By: Ahmed Ishtiaq
General Electric (NYSE:GE), the biggest U.S. conglomerate, has continued its rise through strong growth in its industrial arm. The stock showed considerable volatility over the past year. However, it ended the year with gains of almost 16%. The company has made a substantial recovery since the financial meltdown of 2008. After the meltdown, the company decided to focus on its industrial arm more and reduce its exposure to its financial arm. Looking at the performance of the company it is clear that the strategy is paying off and the company is making a solid recovery.
Recently, GE announced its earnings and the company posted impressive figures. I believe the company is set to have even better 2013 due to the growth opportunities in the emerging markets. Let's look at the earnings and future growth opportunities of the company.
GE recently announced fourth quarter earnings and beat the market expectations. The company recorded a 12% year-over-year increase in profits. For the fourth quarter, GE reported net income of $4.01 billion, or 38 cents a share, up from $3.73 billion, or 35 cents, a year earlier. Earnings after adjustments went up to 44 cents a share from 39 cents, adjustments include items such as pension costs. The earnings after adjustments beat the market expectations by one cent. The market was expecting the company to report earnings of $0.43 per share for the fourth quarter.
The industrial arm of the company played an important role in growth in profits. Margins from the industrial arm of the company have improved over the past year. Industrial margin for the company went up by 0.3 percentage points, in line with the expectations of management. GE management expects to further improve the industrial margin by 0.7 percentage points in 2013. Revenue from GE's industrial businesses, including energy infrastructure and aviation, climbed 3.9% to $28.22 billion. Furthermore, Profit from the industrial businesses was $4.89 billion. GE also returned some of the cash to its shareholders during the quarter. The company repurchased $2.1 billion in stock in the quarter and $5.2 billion for the year, while boosting the quarterly dividend 12 percent to 19 cents per share.
GE Capital is also playing its part towards the rise of the company. Revenues for GE Capital increased by 1.7% to $11.77 billion, and its profit rose 8.9% to $1.81 billion. In addition, the order backlog of the company has increased substantially. The order backlog indicates the future growth, and the current order backlog stands at $210 billion, compared to $203 billion at the end of the last quarter. Infrastructure orders for the quarter were $28.5 billion. Furthermore, the company is targeting organic revenue growth of 2%-6% during 2013.
The industrial arm is expected to drive the future revenue growth of the company. The European and American economies currently face a lot of uncertainties, which gave rise to fears of a decline in orders. However, the current order backlog indicates that the fears were misplaced, and the company will have considerable growth opportunities over the next 12 months. Nonetheless, Europe and America will have slow economic growth, and I expect major growth for GE to come from developing economies. The company has realized that, and it is currently focusing on emerging markets.
Recently, GE decided to invest in Myanmar (Burma), and the company expects to get revenues in the region of $500 million a year from the market. Furthermore, growth in the Chinese economy will drive the future growth for the company. The Indian economy is also showing solid growth, and the company can benefit from this growth in the future. Recently, the company has won a contract worth $500 million from Petrobras of Brazil. GE will supply the main turbomachinery equipment for four new floating production, storage and offloading (FPSO) units. A heavy backlog of orders is sure to provide future revenue growth for this giant. I expect the company to continue solid growth over the next twelve months.
GE has followed a cost cutting strategy along with a focus on its industrial operations. Cost cutting has helped the company achieve higher margins. Furthermore, an increased focus on the core traditional business of the company has augmented revenue growth. At the moment, I believe GE is executing the strategy perfectly, and the company is reaping the benefits of this strategy. We have seen improvement in almost all the financial and operational segments. We have always maintained that GE will prove to be a solid investment, and the current strategy will prove to be a winner for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.