GE Earnings Increase 20%, But Is It A Buy?

Jan.20.14 | About: General Electric (GE)

General Electric (NYSE:GE) is a diversified technology and financial services company operating in the segments of aircraft engines, power generation, industrial products, water processing, household appliances, medical imagine, and business and consumer financing. The company reported earnings before the market opened on 17Jan14 and on the surface everything looked pedestrian with the company reporting fourth quarter earnings of $0.53 per share (in-line with analysts' estimates) on revenue of $40.38 billion (beating analysts' estimates by $160 million). What I'd like to at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenues

Revenue (in millions)

4Q13

4Q12

Y/Y

Power and Water

$ 7,686

$ 7,652

0%

Oil and Gas

$ 5,306

$ 4,548

17%

Energy Management

$ 2,012

$ 1,934

4%

Aviation

$ 6,170

$ 5,467

13%

Healthcare

$ 5,117

$ 5,183

-1%

Transportation

$ 1,460

$ 1,364

7%

Home & Business Solutions

$ 2,196

$ 2,068

6%

GE Capital

$ 11,077

$ 11,605

-5%

Corporate items & eliminations

$ (642)

$ (659)

-3%

Total Revenue

$ 40,382

$ 39,162

3%

Click to enlarge

The first thing I notice is that Oil and Gas along with the Aviation segments are the top producing revenue segments for the company from the prior year. Oil and Gas has jumped 17% while Aviation has popped 13%. These segments' outperformance are due to the trends taking place in the macroeconomic arena where we see boom cycles in both oil and gas and aviation spending here in the U.S. Oil and Gas accounted for 13% of overall revenues while Aviation accounted for 15% of all revenues.

Income Statement

Revenues (in millions)

4Q13

4Q12

Y/Y

Sales of Goods and services

$ 28,701

$ 27,080

6%

Other Income

$ 932

$ 826

13%

GECC earnings from continuing operations

$ -

$ -

-

GECC revenues from services

$ 10,749

$ 11,256

-5%

Total Revenues

$ 40,382

$ 39,162

3%

Click to enlarge

Revenues increased by 3% from fourth quarter of 2012 helped by an increase of 6% from the industrial segments while GECC revenues were reduced by 5%. The thing of note though it is a small portion of the revenues is the 13% increase in other income.

Costs and Expenses (values in millions)

4Q13

4Q12

Y/Y

Cost of sales, operating and administrative expenses

$ 31,039

$ 29,113

7%

Interest and other financial charges

$ 2,468

$ 2,934

-16%

Investment contracts, insurance losses and insurance annuity benefits

$ 654

$ 702

-7%

Provision for losses on financing receivables

$ 1,562

$ 1,144

37%

Total Costs and Expenses

$ 35,723

$ 33,893

5%

Click to enlarge

Costs and expenses increase by 5% from the prior year which I don't see to be too big of a deal. The items to note though are the 16% drop in interest and other financial charges which is a good thing, but the bad thing is the 37% jump in provision for losses on financing receivables.

Earnings (values in millions)

4Q13

4Q12

Y/Y

Earnings from continuing operations before income taxes

$ 4,659

$ 5,269

-12%

Benefit (provision) for income taxes

$ 490

$ (820)

160%

Earnings from continuing operations

$ 5,149

$ 4,449

16%

Earnings (loss) from discontinued operations, net of taxes

$ (787)

$ (303)

160%

Net Earnings

$ 4,362

$ 4,146

5%

Less net earnings (loss) attributable to non-controlling interests

$ 158

$ 135

17%

Net earnings attributable to the company

$ 4,204

$ 4,011

5%

Preferred stock dividends declared

$ -

$ -

#DIV/0!

Net earnings attributable to GE common shareholders

$ 4,204

$ 4,011

5%

Click to enlarge

As can be seen from the table above, earnings from continuing operations before taxes decreased by 12% due in large part to the increase in costs and expenses. However, there was a huge benefit (160%) for income taxes which helped contribute to a large 16% gain in total earnings from continuing operations. There was a $787 million loss due to discontinued operations which brought net earnings to a total gain of 5%. When reducing the net earnings by the negligible $158 million attributable to non-controlling assets we shareholders are left with a 5% gain of net earnings which is not too bad.

Balance Sheet

Assets (values in billions)

4Q13

4Q12

Y/Y

Cash & marketable securities

$ 132.5

$ 125.8

5%

Receivables

$ 21.4

$ 19.9

8%

Inventories

$ 17.3

$ 15.4

12%

Financing receivables - net

$ 241.9

$ 257.2

-6%

Property, plant & equipment - net

$ 68.8

$ 68.6

0%

Investment in GECC

$ -

$ -

-

Goodwill & intangible assets

$ 92.0

$ 85.1

8%

Other assets

$ 80.3

$ 109.5

-27%

Assets of businesses held for sale

$ 0.1

$ 0.2

-50%

Assets of discontinued operations

$ 2.3

$ 3.3

-30%

Total Assets

$ 656.6

$ 685.0

-4%

Click to enlarge

From an assets on the balance sheet perspective we see that assets decreased by 4% from 2012 due in large part to the 6% reduction in financing receivables and the 27% reduction in other assets. Inventories however gained 12%. Other eye-popping line items are the 50% reduction due to assets of businesses held for sale and 30% drop in assets from discontinued operations.

Liabilities (values in billions)

4Q13

4Q12

Y/Y

Borrowings and bank deposits

$ 383.0

$ 413.8

-7%

Investment contracts, insurance losses and insurance annuity benefits

$ 26.5

$ 28.3

-6%

Other liabilities

$ 106.4

$ 111.6

-5%

Liabilities of businesses held for sale

$ -

$ 0.2

-100%

Liabilities of discontinued operations

$ 3.0

$ 2.7

11%

GE shareowners' equity

$ 131.5

$ 123.0

7%

Non-controlling interests

$ 6.2

$ 5.4

15%

Total liabilities and equity

$ 656.6

$ 685.0

-4%

Click to enlarge

I definitely like seeing that liabilities decreased by 4% overall compared to 2012 with all the liabilities related to businesses held for sale being off the books now. However, there was a slight increase in liabilities due to discontinued operations and non-controlling assets. The major contributor to the reduction in the liabilities though was the 7% decrease from borrowings and bank deposits.

Conclusion

Earnings from continuing operations

$ 4,991

$ 4,314

16%

Adjustment (net of tax): Non-operating pension costs/(income)

$ 426

$ 350

22%

Operating earnings (non-GAAP)

$ 5,417

$ 4,664

16%

Diluted Shares

10162

10500

-3%

Operating earnings - diluted earnings per share

$ 0.53

$ 0.44

20%

Click to enlarge

The company reported earnings which were 20% higher than a year before on slightly more revenue while the share price was up 20.6% in the past year excluding dividends. The share count has decreased slightly for the entire year. It is definitely evident that earnings from GECC are being decreased due to an increase in all the industrial segments. I definitely love that both earnings per share and revenue were up year over year while liabilities decreased for the entire year. I don't like that assets decreased for the entire year but I believe it should be stemmed going forward. On a fundamental basis this conglomerate is fairly with respect to 2014 earnings but I believe is a victim of super high expectations and that is why the stock was beaten up the day it reported. The company didn't say that things are picture perfect though, it spoke about a mixed picture. Because the outlook seems cloudy at the present and the stock appears to be fairly valued I am not going to be purchasing any shares in the company at this particular moment in time.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.