General Electric (GE) announced its third quarter results on Friday before the market open. The results were welcomed by Wall Street as GE reported a solid order intake combined with improved operating margins.
In its attempt to re-create a strong US industrial powerhouse again, GE continues to offer appeal to long-term investors as shares are setting fresh five-year highs on the back of the results.
Third Quarter Results
General Electric generated third quarter revenues of $35.72 billion, down 1.5% on the year before. Consensus estimates for revenues stood at nearly $36 billion.
Operating earnings fell by 10.3% to $3.61 billion, resulting in operating earnings of $0.36 per share, a penny ahead of consensus estimates. Excluding restructuring and other charges, earnings came in at $0.40 per share.
GAAP net earnings from continuing operations fell by 9.3% to $3.18 billion, coming in at $0.32 per share.
CEO and Chairman Jeff Immelt, "Our third-quarter results were very strong in an improving global business environment. Orders grew 19% with orders growth around the world."
Looking Into The Results
GE's industrial activities showed modest growth of 2.1% as revenues totaled $25.26 billion. Revenues at GE's financial unit fell by 5.4% to $10.64 billion.
GE's industrial activities took in orders of $25.7 billion for the quarter, up by 19%. This represents a book-to-bill ratio of 1.2, as the backlog rose to a record of $229 billion.
The company took in some larger orders includes a $1.9 billion order for power generating equipment in Algeria. GE furthermore received large commitment for aviation orders as well.
Looking Into The Divisional Performance
While the overall industrial activities reported a modest growth in revenues, there was quite some volatility in between segments.
GE saw some weakness in the power & water business, which reported a 10% fall in revenues to $6.50 billion. Operating earnings rose by 9% to $1.29 billion despite the shortfall in revenues.
Strong performing businesses were the oil and gas business, which reported an 18% increase in revenues to $4.31 billion. The aviation segment reported a solid 12% increase in revenues as well, as revenues totaled $5.36 billion. Note that the performance in both segments was aided by recent acquisitions.
While most segments show healthy earnings, the profitability of the energy management and home & business solutions operations are quite disappointing.
GE ended its third quarter with $130.4 billion in cash and marketable securities. Total borrowings stand at $388.1 billion, mainly tied to the financial activities. The industrial activities hold $10.3 billion in cash and equivalents, while operating with $12.6 billion in debt, for a net cash position of $2.3 billion.
Revenues for the first nine months of the year, including the financial unit came in at $105.9 billion, down 2% on the year before. Earnings attributable to shareholders rose by 2% to $9.9 billion. At this pace, annual revenues are seen around $144 billion, as earnings are expected to come in around $14 billion.
Trading around $25.50 per share, the market values GE at $260 billion. This values assets of the firm at 1.8 times annual revenues and 18-19 times annual earnings.
GE pays a quarterly dividend of $0.19 per share, for an annual dividend yield of 3.0%.
Some Historical Perspective
Shares of GE still have a lot of ground to make up for. Shares peaked around $60 per share at the turn of the millennium and set intermediate highs of $40 in 2007. Shares fell to lows of $6 when the Oracle of Omaha needed to come to the rescue back in 2009, but have seen a steady recovery to levels around $25 at the moment.
Between 2009 and 2012, GE saw its annual revenues fall by a cumulative 5% to $145 billion. Earnings rose by nearly a quarter to $13.6 billion in the meantime. Note that GE has recently started to repurchase some of its own shares, but the share count has only fallen by 3-4%.
Under command of CEO Jeff Immelt, GE continues to transform its business. GE continues to gradually wind down the capital unit, while boosting the industrial activities.
Immelt called the results very strong, with exception of the power and water business, which demonstrated good profitability, despite the falling revenues. Overall, the backlog is growing rapidly, as investors are waiting for this build up in backlog to translate into actual revenues.
The total backlog represents roughly 2.3 years of industrial annual revenues at the current run rate, driven by strong transportation and aviation orders. Notably equipment orders were very strong, increasing by an overall 32% to $15.1 billion, as service orders, which are lagging rising by 5% to $10.6 billion.
All this growth in orders are gradually translating into operating profit expansion. Operating earnings rose by 120 basis points over the past quarter, leaving GE on track to reach its full year target for 70 basis points margin expansion.
While operating earnings showed solid growth on the back of the slight increase in revenues, one-time items resulted in a fall in net GAAP earnings. GE took $0.02 per share charges in general restructuring efforts, and a similar amount related to the Avia acquisition.
So GE continues to make steady progress boosting its industrial activities, while winding down the capital division. Note that this will still take a very long time, but the company is already seeing tailwinds from this transformation, including increased valuation multiples.
GE furthermore remains on track to treat its shareholders well during this transition phase. The company is on track to return some $18 billion in cash to its shareholders this year, roughly $8 billion through dividends, and the remainder of $10 billion in share repurchases. Based on the current valuation, GE is returning cash to its shareholders at a total yield of 7%.
Back in July of this year, I last took a look at GE's prospects. I concluded that the GE Capital debacle during the financial crisis almost brought the company to its knees, and the strategic change to focus on the industrial activities should be applauded. This strategic choice was furthermore highlighted by the $3.3 billion acquisition to acquire Lufkin Industries, to boost GE's presence in oil and gas. Last year, the company already spent $4.3 billion to acquire Italian-based Avia S.p.A. to strengthen the aviation activities.
The progress made so far this year in margin expansion and increased payouts, through a dividend hike and a large share repurchase plan, has resulted in year to date returns of over 20% so far this year.
Shares are currently trading at their highest levels since 2008. I reiterate that the sound strategic vision, share repurchases and interesting dividend yield should provide moderate to good returns in the medium to good term. Don't buy GE for a short-term gain, but the current strategic vision, to create a US industrial powerhouse again, could result in nice long-term payoffs for shareholders.