GE (GE) is a premier infrastructure company, and is a leading supplier of industrial goods for industries such as power and water, energy management, oil and gas, aviation, transportation and healthcare.
On 18 December, 2013, the company came out with its annual outlook for FY 2014. Following are the estimates, outlook and my analysis.
The company expects to achieve 0-5% revenue growth in FY 2014 driven by the industrial segments, which are expected to deliver 4-7% growth powered by the record order backlog of $229 billion (Q3 FY 2013), technological expertise, growth markets, and services.
However, GE capital, the financial division of the company, is expected to show a subdued performance with flat to minus 5% shift in the revenues. For long term (2015), the company reaffirms its target to increase the share of its industrial revenues to 70% by curtailing its financial businesses.
The company expects an infrastructure-led growth from the growth/emerging/developing markets. However, the performance will widely vary from country to country.
Really the growth market is still positive, for us China is still a great story, the resource rich markets are still a good story. But there is volatility in places like India and Brazil probably had a tough year this year than we would have expected. But places like Mexico are actually quite strong, when I look at 2014.
Growth in these markets will be driven by its vast reach (covers around 160 countries), localized offerings, and technological expertise, which is always its biggest strength. The largest ever order backlog ($170 billion service backlog) will help it to achieve continued growth in the services.
The margins of the industrial segments are expected to show a constant growth with a target of 17% by the year 2016 from 15.8% in 2013. The prime reasons behind the margin growth are: cost optimization, more services revenues and cost-management.
Except for GE Capital and Transportation segments, all other segments are expected to show growth in FY 2014. The Power & Water segment, which underperformed during FY 2013, is expected to get back on the growth path due to the rising demand from the developing markets. The Transportation segment is expected to show a negative growth due to the slower demand from North America, and the mining sector.
GE Capital long-term strategy:
The company holds a huge financial portfolio via GE Capital, which during 2008-09 financial crisis threatened the financial stability of the company. Ever since then, the company intends to bring down the share of its financial revenues to 30% of the total revenues. The company intends to achieve its target by the year 2015 after the spin-off of its North American retail finance business unit.
The company made it clear that the 30% is the ultimate target, and the company has no intentions to bring it down beyond 30%, as once the 30% target achieved, the company sees it as a business that grows in tandem with the industrial businesses (see the chart below). So, the investors who are hoping for a complete spin-off of the financial segment will have to live with the reality that no matter how risky it is, the financial business is the important and integral part of the company and is necessary for the company's growth.
During the last few years, the company has been rapidly raising its divided. It declared $7.4 billion in dividends in 2012. Its per-share dividend increased 15% to $0.70 in 2012 after an increase of 33% to $0.61 in 2011. In FY 2013 during the first nine months, the company paid $0.57 per-share ($5.8 billion) in dividend, representing a dividend payout of over 59%. Overall in FY 2013, the company intends to return $18 billion to shareholders through dividends and buybacks.
For the next three years (FY 2014-16), the company targets to bring down its float from over 10 billion shares (Q3 FY 2013) to below 9.5 billion shares by buybacks. Recently the company increased its quarterly dividend by 16% to $0.22 per-share.
So, the investors can expect healthy dividends growing forward.
Industrial segments strategy (long-term):
Though, the company doesn't mention this specifically, it looks like that the company's strategy for the future is as follows:
- Focus on services and margins:
The company wants to focus more on the margin expansion in the services business to get better return from its huge $170 billion service backlog by improving its field productivity and repair technologies in the years to come.
The company will focus more on the analytical services to get more business and better margins from its large installed-base. The company increasingly is making analytical products an integral part of its industrial products as it is equally beneficial for the company (more business and better margins) and customers (more insights which leads to productivity gains and improved efficiencies).
- R&D focus:
In the years to come, its global research centers will concentrate on the material science to cut the production costs by making cost-effective materials that can be used across different segments. Moreover, the company will focus more on the rapid introduction of new products in the segments such as Power gen (Power and Water), Electrification (Energy Management), Diagnostics/sensors (Health-care).
- Cost-effective manufacturing and R&D:
The company will gradually shift its manufacturing as well as R&D base to low cost destinations such as India, Poland, Vietnam, etc. to bring down the costs.
- Focused markets:
The company in search of growth is shifting its focus to the emerging economies, and resource rich regions such as China, Russia, Brazil, Russia, Africa, ASEAN, etc.
- Curtail "selling, general and administrative" expenses
The company wants to reduce SG&A expenses to 12% of the revenues (industrial) by 2016. It intends to achieve the target through various initiatives such as leaner management, distributed leadership, shared services.
- Peaking growth from developed markets:
The company's latest estimates showed that, for the company, the growth in the developed markets has been peaking out, and for the time being, the most of the growth will be limited to the faster execution of existing order backlog and also from the margin expansions (by improvement in cost structure and more contribution from the services).
- Emerging markets risk:
The company's increased focus, or in other words, increased dependence on the emerging/growth economies will increasingly expose it to the risks associated with the emerging economies. For example, the company is expecting a significant growth from China (see the chart below), which holds significant risks like steeply and rapidly altering economic cycles, different government policies and regulations, different working culture, low margins, intense competition, etc.
- Commodity price risk:
The company's focus on the resource rich markets (see the table below) from where the company expects to get $50 billion of annual orders will increase its exposure to the commodity price risks. The investments in the resource-based industries fluctuate along with the resource prices, and during down cycles, the risks of defaults and project-delays increase significantly. This basis nature of the resource-based industries can make the revenues to fluctuate more in the future.
- Current business environment is very competitive:
The company is targeting to reduce SG&A expenses (industrial segments) by at-least 350 bps from 15.5% of the industrial revenues in 2013 to 12% by 2016. The company also predicted that the margins will increase by 120 bps from 15.8% in FY 2013 to 17% by 2016.
The above two estimates clearly show that the overall business environment is very competitive. And for the time being, the cost reduction is the prime way to boost the margins.
The company is a global company, and for the future, it is looking towards the emerging/growth markets for the growth, due to the subdued growth in the developed markets. The company is counting heavily on its technological expertise and R&D capabilities to get more business from the emerging markets, and on its cost reduction measures to boost the margins. The expected increase in the revenues from the emerging economics will increase the company's exposure to the risks associated to the emerging markets (discussed above).
The company's move to shift manufacturing and R&D to cost-effective locations will enhance the cost-effectiveness of the company in the future and will allow it to compete effectively in the markets. Its order backlog* is big enough to sustain the revenues (industrial segments) in the near future. However, it will be difficult for the company to show any meaningful growth until the growth from the developed markets returns.
*The company's order backlog of nearly $229 billion (3Q FY 2013) is over 2x of its annual revenue (industrial segments).
The significant run-up in the share prices (due to multiple positive developments) during the last twelve months (see the chart below) demands a little caution. However, the company still offers an dividend yield of over 2.8% along with excellent long-term fundamentals.
Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.
This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.