Investors in General Electric (GE) are not pleased with the fact that the company missed its industrial operating earnings margin target for 2013, even as it missed its target by just a small margin.
The modest correction on Friday on the back of this therefore translates into a nice entry opportunity in my opinion as the underlying business remains healthy. GE still represents an excellent investment for a long term dividend-oriented investment portfolio.
Fourth Quarter Results
GE reported fourth quarter revenues $40.38 billion, up 3.1% on the year before, and ahead of consensus estimates at $40.1 billion. Reported earnings attributable to common shareholders rose by 4.8% to $4.20 billion.
Reported GAAP earnings of $0.41 per share on a diluted basis, were up by three cents compared to last year. Earnings from continuing operations rose by eight cents to $0.49 per share. Adjusted operating earnings came in at $0.53 per share in line with consensus estimates.
Jeff Immelt noted that the company ended the year strong in an improving but still mixed environment, notably in Europe. Immelt is pleased with the execution in 2013, cutting costs which boost margins, while shrinking GE Capital and returning cash to investors.
Looking Into The Results
GE's top line growth is driven by its industrial business whose revenues rose by 6.0% to $28.70 billion. GE saw earnings growth in six out of its seven industrial segments, boosting overall margins by 100 basis points. The aviation business and oil & gas operations were driving topline and earnings growth.
The strong order intake resulted in a backlog increase of $15 billion in just a three month period, standing at a record of $244 billion. The backlog grew on the back of engine orders as well as turbines. While top line growth is solid, GE aims to cut costs by another billion in 2014.
The capital business reported a 4.5% decline in revenues towards $10.75 billion as it continues to wind down while pursuing opportunities when they arise. Segment earnings rose sharply by some 38% to nearly $2.5 billion despite the fall in revenues.
Note that reported GAAP earnings growth has been very modest. This came on the back of losses of $787 million from discontinued operations, compared to losses of just $303 million last year.
GE reported full year revenues of $146 billion, essentially unchanged from last year. Earnings came in at $14.1 billion, up 3% on the year below on the back of lower tax rates. This is a slight risk in my opinion as GE paid just $676 million in taxes on such a huge earnings number. Note that earnings per share growth was a bit higher after GE repurchased roughly 3% of its outstanding share base over the past year.
At $26.50 per share, the market values GE at $268 billion. This values equity in the business at roughly 19 times annual earnings, which is not cheap. Note that discontinued operations hurt earnings a bit, yet effective tax rates have been very low as well.
Takeaway For Investors
Shareholders are slightly disappointed with GE for missing its so important operating industrial margins target. Instead of the guided 70 basis points margin increase for the full year, as reiterated on the 18th of December, margins rose by 60 basis points. Supply chain distributions in wind turbines and a modest underperformance in other businesses hurt margins.
Even as GE was able to meet revenue and earnings consensus estimates, and the miss in margins has been very small, the market is not happy with Immelt who reiterating this target less than a month ago.
At the start of the year, I checked out GE's prospects after the company strengthened its healthcare business by acquiring the healthcare unit of Thermo Fisher (TMO) for $1.06 billion. The deal fits perfectly within the strategy of growing the industrial activities by making bolt-on acquisitions focusing on R&D, organic growth and margins.
The slight disappointment on Friday therefore translates into a buying opportunity in my opinion. The company remain on the right track. The 3.3% dividend yield is very competitive to returns on 10-year treasuries. Don't buy GE with the intention of making a quick buck. Yet the dividend, modest repurchases and continued organic growth should continue to deliver long-term results.