General Electric Company (NYSE:GE) is a well-diversified global organization that manufactures and markets industrial, technological, and financial products and services. The products and services of the company range from aircraft engines, power generation, water processing, and household appliances to medical imaging, business and consumer financing, and industrial products. The company just released its earnings for the first quarter of FY2014. Let us see where the company is headed in the future and if the company is a good candidate for investment.
Looking at the company's revenue breakdown in terms of operating segments, approximately 70% of the top line is generated through the industrial operations of the company while the remaining 30% of revenues are attributed to the GE Capital segment. The various sub-segments within the industrial segment of the company driving the revenue stream are energy management, aviation, healthcare, transportation, appliances and lighting, and oil and gas.
Geographically, the company is spread across various parts of the world wherein the U.S. is the largest contributor to the top line of the company. The following chart shows the division of revenues in terms of geography.
Source: Annual Report, 2013
Earnings, Analyst Estimates, and Segmental Performance
GE's top line for the quarter fell 2% YoY to $34.2 billion, slightly below the analyst estimated value of $34.4 billion. Net profit for the quarter plummeted by 15% YoY to $3 billion, trailing the analysts' estimates. Although the company's bottom line slipped by 15% the company managed to beat the analysts' estimates; GE reported EPS of $0.33 beating the consensus estimate by 1 cent.
The company's total industrial revenues grew by 8% YoY to $24.6 billion, whereas the earnings figure showed an increase of 12% YoY. The revenue stream benefited from the double digit growth in its larger segments as opposed to the weak performance observed in the relatively smaller segments. The major reason for the large increase in profits compared to earnings is the 50 basis point enhancement in margins increasing from 12.9% last year to 13.4% in the present year. Reportedly, only 8% of this increase is attributable to organic performance, which reflects the rise in top line growth.
Looking at the sub segment performance of the company, oil and gas showed stellar performance compared to all the other units. The revenue of the unit increased by 27% YoY and earnings increased by 37%. The margin enhancement, after recognizing the impact of the top line, is largely attributable to cost cuts and an 80bps increase in margins. Power and water underscored growth in revenues of 14% with 24% growth in earnings. Again, the growth in earnings is only partially attributable to revenues because this segment's margins also increased by 120 basis points. The aviation unit realized 14% growth in revenues and a 19% increase in earnings.
Smaller segments like transportation, healthcare equipment, energy management, and appliances weighed upon the bottom line growth with a steep 67% fall in energy management's profits. Revenue growth remained weak as well across these segments.
Where the industrial segment's revenues shot up by 8%, GE Capital revenues dropped at the same rate to $10.52 billion. The real estate unit showed the weakest performance in this segment marking a steep 62% decline in sales and a 65% drop in profits. The company is planning to divest the unit in the wake of extensive losses.
GE Capital Expected to Shrink Further
The company is struggling to improve its profit margins and its efforts entail divesting a few of the company's loss enduring segments. The company will divest any businesses that are not meeting the minimum 10% profit threshold and might let go of properties worth $4 billion by the end of this year.
We know that GE Capital has been showing laggard performance so GE might divest its real estate business and stakes in international banks to improve the segment's profit margins. The size reduction of this segment would not only enhance the overall financial position of the company but would also generate funds to be invested in profitable opportunities and/or be distributed among the shareholders. Towards the end of the current quarter, the company filed an IPO of one of its North American consumer lending businesses that will be known as Synchrony Financials after the separation. The divestiture is intended to help GE stay focused on its core industrial businesses by parting from unrelated ones.
The company's GE Capital business has been contracting since the financial crises emerged in 2009 leading to a significant drop in dividends paid by the company that year. Real estate and home loans were the first ones to be separated from the company's operations.
The company maintains an excellent record of rewarding its shareholders with a methodical distribution of profits among investors in the form of dividend increases and share repurchases. Annual dividends paid by the company have increased at a CAGR of 20% since the drop in 2009. Take a look at the following figure for the graphical representation of increases in dividend yields and declining figure of outstanding shares.
The industrial profits of GE have increased by double digit growth rates while the company is making a consistent and continuous effort to streamline its operations and separate underperforming segments. With these divestitures, the overall financial position of GE will improve. The company distributes a reasonable level of profits among the shareholders so GE looks like a good candidate for investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.