Shares of General Electric (GE) trade at the highest level since 2008 when the Capital business almost bankrupted the entire company, including its industrial activities.
The successful restructuring from that time onwards, margin expansion, and sound strategic vision to cut its Capital business activities have propelled shares forward. Shares gained even more after the release of its second-quarter earnings results.
While shares are no obvious bargain at these levels, they continue to offer long-term appeal based on a sound strategy and fairly decent dividend yield.
General Electric generated second-quarter revenues of $35.12 billion, down 4% on the year before. Revenues fell short of consensus estimates of $35.6 billion.
Despite the decline in revenues, net earnings attributable to GE's shareholders rose by 1% to $3.13 billion. Note that earnings from continued operations fell by 11% to $3.26 billion. Net earnings only rose as the company realized narrowing losses from discontinued operations.
Earnings from continuing operations fell by 9% to $0.32 per share, while reported GAAP earnings came in two cents below that level. Operating earnings came in at $0.36 per share, beating consensus estimates by a penny.
CEO and Chairman Jeff Immelt discussed the developments during the quarter:
GE achieved Industrial segment profit growth in six of seven businesses, reduced structural costs, and continued to invest in growth. We executed in a business environment that was slightly improved versus the first quarter. Emerging markets remain resilient, and in the U.S. we saw strong growth in orders this quarter. Europe is stabilizing but still challenged. We expect margin expansion to continue and segment profits to grow in the second half of the year.
Looking Through The Results
The decline in revenues was caused by a weaker performance at the power and water business, which saw revenues fall by 17% to $5.71 billion. Other segments, including the aviation and oil and gas business grew revenues at a healthy 9%.
The company managed to limit the fall in operating income for the power and water business to 17% as well. It saw positive operating leverage in the oil & gas as well as aviation business, resulting in earnings growth outpacing revenue growth.
GE ended its second quarter with a $132.5 billion in cash and equivalents. The company operates with $387.3 billion in borrowings and bank deposits, largely tied to GE Capital.
Revenues for the first six months of the year came in at $70.1 billion, down 2% on the year. Net earnings rose by 8% to $6.7 billion in the meantime. As such, GE is on track to generate annual revenues of approximately $140 billion on which it could earn $13 to $14 billion.
Trading around $25 per share, the market values GE at $258 billion. This values the firm at approximately 1.8 times annual revenues and 19 times annual earnings.
After raising its dividend in recent times, GE pays a quarterly dividend of $0.19 per share, for an annual dividend yield of 3.1%.
Some Historical Perspective
Despite the recent strength of GE's shares, long-term holders are still suffering losses. Investors who invested in the company a decade ago are looking at capital losses of around 10%.
Shares peaked around $40 per share back in 2007. The financial crisis and high leverage from GE Capital almost brought the firm to its knees in 2009, when Warren Buffett came to the rescue at around $6 per share. From that point in time, shares have steadily re-gained lost ground, currently trading at recent highs of $25 per share.
Between 2009 and 2012, GE has seen its annual revenues fall by some 5% towards $144.8 billion. Net earnings rose by almost a quarter towards $13.6 billion as GE is boosting profitability and cutting back on its GE Capital business.
After the debacle when GE Capital almost took the entire company down, GE has been focusing to grow its industrial activities while slowly cutting back on the Capital business, especially as it was marked as "too-big-to-fail" by the Federal Reserve.
The industrial businesses, with exception of power and water have been performing well over the past quarter. GE has been focusing on the oil and gas business as well as the aviation business, and total industrial margins grew already by 50 basis points. CEO Immelt guided for a 70 basis points expansion in industrial margins for the full year.
The company made strategic acquisitions in recent times in this area. Back in April it acquired Lufkin Industries in a $3.3 billion deal to boost its oil and gas operations. At the end of 2012, GE expanded its aviation unit with the $4.3 billion deal to buy Avia S.p.A.
At the end of 2012, the company announced some early holiday presents for its shareholders. From that point in time, shares have advanced by almost 20% year to date. At the time, the company boosted its quarterly dividend by 12% to $0.19 per share, for a current yield of 3.1%. The company furthermore announced a $10 billion expansion of its share repurchase plan, sufficient to retire almost 4% of its shares outstanding.
The transition is going well, reducing the vulnerability of GE to a tail event in the Capital business, which could potentially bankrupt the entire business. The industrial unit is performing well, as the backlog rose by 4% during the quarter alone to $223 billion, the equivalent of 1.6 times annual revenues at this rate. Converting this backlog into current revenues will be the next goal, in order to report meaningful revenue growth again.
In the meantime the valuation at 19 times annual earnings is a bit steep, but provides a decent alternative to low-yielding rate instruments. The 3.1% dividend yield, the sound strategic vision of the company, and share repurchases could provide moderate to good returns in the medium- to long-term.