General Electric's Second Quarter Earnings Were Electrifying To Me

Jul.19.14 | About: General Electric (GE)

Summary

GE is my second favorite earnings report to listen to after Union Pacific.

Revenue and earnings per share both increased compared to last year and last quarter.

I'm going to scrounge up some money to buy some more shares in the stock before it takes off as it has done almost nothing in the past year.

The last time I wrote about General Electric Company (NYSE:GE) I stated: "I'm only buying a small batch right now to grab a slice of the dividend, but am not really enthusiastic about it." Since that article was published the stock is down 1.34% while the S&P 500 (NYSEARCA:SPY) is up 2.06% in the same timeframe. It's safe to say that I saved some heartache by not putting on a full position back then. General Electric 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 18Jul14 and on the surface the results were weak with the company reporting earnings of $0.39 per share (in line with estimates) on revenue of $36.2 billion (missing estimates by $110 million). The stock decreased 0.56% the day it reported earnings and what I'd like to do 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 Revenue

Revenue (in millions)

2Q14

1Q14

2Q13

Q/Q

Y/Y

Power and Water

$6,292

$5,509

$5,715

14%

10%

Oil and Gas

$4,761

$4,308

$3,955

11%

20%

Energy Management

$1,856

$1,672

$1,981

11%

-6%

Aviation

$6,090

$5,778

$5,303

5%

15%

Healthcare

$4,483

$4,198

$4,490

7%

0%

Transportation

$1,306

$1,227

$1,597

6%

-18%

Appliances & Lighting

$2,120

$1,857

$2,127

14%

0%

GE Capital

$10,247

$10,515

$10,916

-3%

-6%

Corporate items & eliminations

$(922)

$(886)

$(1,025)

4%

-10%

Total Revenue

$36,233

$34,178

$35,059

6%

3%

Click to enlarge

Upon first glance at the revenues we see a 10% gain from last year (and 14% gain from last quarter) in the Power & Water segment. The Power & Water division accounted for 17% of total revenues during the quarter and the increase in revenue was due to a 28% increase in gas turbine orders. An even better story is told in the Oil & Gas segment had a 20% jump in revenue when compared to last year and an 11% jump when compared to last quarter. Oil & Gas accounted for 13% of all revenues and the increase was due in large part to a large order being made for the new 20k PSI drilling system, the first in the industry for Maersk and BP. In other news, there was a 15% increase in revenues from last year (up 5% from last quarter) in the aviation segment. Aviation makes up for 17% of revenues and was up on the strength in international military orders. Not all of segment revenues were good news though. The transportation segment dropped 18% when compared to last year. Luckily the transportation segment only accounts for 4% of all revenues and the hit was due to a tough environment. Management did mention that locomotive orders should pick up at the back half of the year as they were expected to ship about 600 units during the year but now it is looking like 750 units. I like the revenue portion of the report for now as a 3% increase from last year is pretty good for such a large company.

Income Statement

Revenues and Other Income (in millions)

2Q14

1Q14

2Q13

Q/Q

Y/Y

Sales of Goods and services

$26,098

$23,850

$24,502

9%

7%

Other Income

$338

$196

$104

72%

225%

GECC earnings from continuing operations

$-

$-

$-

N/A

N/A

GECC revenues from services

$9,797

$10,132

$10,453

-3%

-6%

Total Revenues

$36,233

$34,178

$35,059

6%

3%

Costs and Expenses

Cost of sales, operating and administrative expenses

$28,483

$26,718

$27,029

7%

5%

Interest and other financial charges

$2,345

$2,414

$2,600

-3%

-10%

Investment contracts, insurance losses and insurance annuity benefits

$658

$620

$687

6%

-4%

Provision for losses on financing receivables

$968

$970

$1,010

0%

-4%

Total Costs and Expenses

$32,454

$30,722

$31,326

6%

4%

Earnings from continuing operations before income taxes

$3,779

$3,456

$3,733

9%

1%

Benefit (provision) for income taxes

$(193)

$(516)

$(310)

-63%

-38%

Earnings from continuing operations

$3,586

$2,940

$3,423

22%

5%

Earnings (loss) from discontinued operations, net of taxes

$(41)

$12

$(124)

-442%

-67%

Net Earnings

$3,545

$2,952

$3,299

20%

7%

Less net earnings (loss) attributable to noncontrolling interests

$-

$(47)

$166

-100%

-100%

Net earnings attributable to the company

$3,545

$2,999

$3,133

18%

13%

Preferred stock dividends declared

$-

$-

$-

N/A

N/A

Net earnings attributable to GE common shareholders

$3,545

$2,999

$3,133

18%

13%

Earnings from continuing operations

$3,586

$2,987

$3,257

20%

10%

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

$344

$12

$430

2767%

-20%

Operating earnings (non-GAAP)

$3,930

$2,999

$3,687

31%

7%

Diluted Shares

10,110

10,123

10,328

0%

-2%

Operating earnings - diluted earnings per share

$0.39

$0.30

$0.36

31%

9%

Click to enlarge

Other income increased by 225% from last year, or $142 million. Total revenue increased 3% from last year and 6% from last quarter. On the operations side of things the company kept interest and other financial charges down by 10% from last year but total costs and expenses increased 4% in the same timeframe, keeping earnings before taxes afloat by 1%. Provision for taxes increased by 38%, which helped keep earnings from continued operations up 5%. There was a 67% increase in earnings from discontinued operations which kept net earnings at a value of 7%. After a complete removal of losses due to noncontrolling interests, net earnings attributable to the company increased 13% from last year. From a non-GAAP perspective there was a 20% drop in pension related costs. After taking into consideration the 2% reduction in shares, shareholders made out with a 9% gain in earnings when compared to last year.

Balance Sheet

Assets

2Q14

1Q14

2Q13

Q/Q

Y/Y

Cash & marketable securities

$133.3

$132.7

$132.5

0%

1%

Receivables

$21.4

$21.0

$21.4

2%

0%

Inventories

$19.7

$18.9

$17.3

4%

14%

Financing receivables - net

$231.1

$237.0

$241.9

-2%

-4%

Property, plant & equipment - net

$67.9

$67.7

$68.8

0%

-1%

Investment in GECC

$-

$-

$-

N/A

N/A

Goodwill & intangible assets

$93.8

$93.9

$92.0

0%

2%

Other assets

$79.9

$79.6

$80.0

0%

0%

Assets of businesses held for sale

$3.3

$-

$0.1

N/A

3200%

Assets of discontinued operations

$1.5

$1.5

$2.3

0%

-35%

Total Assets

$651.9

$652.3

$656.3

0%

-1%

Liabilities and equity

Borrowings and bank deposits

$378.7

$380.6

$383.0

0%

-1%

Investment contracts, insurance losses and insurance annuity benefits

$27.4

$27.0

$26.5

1%

3%

Other liabilities

$104.3

$105.4

$106.1

-1%

-2%

Liabilities of businesses held for sale

$0.3

$-

$-

N/A

N/A

Liabilities of discontinued operations

$1.1

$1.3

$3.9

-15%

-72%

GE shareowners' equity

$134.0

$131.8

$130.6

2%

3%

Noncontrolling interests

$6.1

$6.2

$6.2

-2%

-2%

Total liabilities and equity

$651.9

$652.3

$656.3

0%

-1%

Click to enlarge

Inventories increased 14% on the asset side of the equation while assets of businesses held for sale increased 3,200% (or $ 3.3 billion). Assets of discontinued operations decreased 35% which brings the assets side of the equation down 1% from last year. On the liabilities side of the equation, there was a 72% reduction in liabilities of discontinued operations and total liabilities decreased by 1%.

Conclusion

The company reported earnings, which were 9% higher than a year before on 3% higher revenue, while the share price was flat (down 0.38%) since the first quarter earnings announcement. I don't believe the company needed to reduce the outstanding shares during the quarter because I always felt it was close to fairly valued, but it is what it is. I definitely like that revenue increased from last year, and that earnings were up along with it, even without the help of the share reduction.

The company did shed some light on the Alstom transaction saying that it believes the closure of the deal will be in 2015 and will be able to add $0.06 to $0.09 of earnings in 2016. You would think that since the company beat on the top and bottom lines that the stock would be flying high on a day that the S&P 500 jumped 1.03%, right? Wrong, it dropped 0.56% but this earnings report makes me want to buy the stock.

I did some additional digging to try and find out why the stock may have dropped rather than increase and the only thing I could find was that the analyst from Bernstein believes that this report wasn't as clean as the last report and that the company came in a penny below their expectations. Another concern they have is that the equipment order decline and pressure in pricing for equipment outside of aviation may get to the stock. I honestly thought that this quarter was better than last quarter and I'll probably be buying it soon.

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: The author is long GE, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.