GE Capital's rampant over-expansion and risk exposures didn't wreck General Electric (GE), but it came closer than it should have ever been allowed. While GE has been busy fixing the financing arm (largely by reining in operations), it has also been actively building operations like energy services/equipment and power generation. While GE has already come back from the worst of its malaise, there's still fairly solid potential left in this huge industrial conglomerate.
Surprising Solid First Quarter Results
When it comes to growth, GE's industrial operations delivered in spades. While total company revenue fell 8%, organic growth was 4%. In the industrial business, though, organic growth was a surprisingly strong 11% - nearly doubling many sell-side guesstimates. Organic order growth of 14% was further confirmation that GE is at a good place in this cycle.
Profitability was likewise a product of where you look. Total company profits fell 5% as reported, while industrial profits rose 10%. As those numbers suggest, the company did see some margin erosion and this is an issue that management has to address before long.
Energy Generating The Results
GE's energy business continues to be the prime mover of the company's results. Energy revenue rose 18%, as very strong power generation results ("Energy", up 13%) were sweetened by even stronger growth (34%) from the company's energy equipment business ("Oil & Gas").
After a decade-long wait, the company's gas turbine business is finally coming good as utilities switch to natural gas en masse and scrap plans for new coal or nuclear facilities in favor of natural gas plants. This bodes well for companies like Siemens (SI) and Alstom as well, and also suggests more activity for companies like ABB (ABB) in the equipment that surrounds turbine installations.
While other areas of power gen, like solar and wind, are suffering from industry-wide malaise, GE has established its beachhead. Just as GE has nearly overtaken Vestas for the #1 slot in U.S. wind turbines, it would seem a mistake to underestimate GE's potential to threaten companies like Vestas, Gamesa, and First Solar (FSLR) in renewables.
Oil and gas equipment continues to thrive on demand for subsea equipment and services. Although organic revenue growth was 8% and well below the gaudy headline number, organic equipment order growth of 64% is legitimately interesting. While good demand in process equipment speaks well to business conditions for Emerson (EMR), GE seems to be making a splash in the subsea market against the likes of Aker, Cameron (CAM), and FMC (FTI). While GE isn't close to threatening National Oilwell Varco (NOV) in rig equipment, that share growth in subsea and surface equipment bears watching.
Big Machines Moving With Speed
GE is also seeing good demand in its large transportation and aviation segments. Although aviation orders lagged revenue growth (8% versus 12%), much of that was due to some defense program cancellations - the commercial business continues to do well and the company is gaining engine share against United Technologies (UTX).
The transport business is likewise seeing incredible order growth (up 131%) for locomotives and mining vehicles - performance in the later is actually looks better than what Joy Global (JOY) and Caterpillar (CAT) have been talking about lately.
Healthcare Coming Back, Home And Business Not There Yet
GE's healthcare business is showing some slow progress; revenue rose 5% but orders climbed 6%. Although GE is still lagging Hologic (HOLX) in next-gen mammography, orders in emerging markets are coming in nicely as the company sees emerging market interest in cath labs, diagnostics, and the whole range of GE's offerings.
In home and business, there were few surprises. Appliance demand is coming back, but the lighting market is still poor.
What's Still Not Great
GE Capital is still a bit of a mess as the company "right-sizes" the business and pares back down to core competencies like industrial lending and leasing. Nevertheless, it's getting less-bad at an improving rate and the stress test results suggest that it will resume paying a dividend to the parent company in the near future. That said, the charge tied to exiting the Irish mortgage business serves as a good reminder of how wrong this business went at one point.
Margin leverage is also an issue at this point. Neither the aviation nor the energy segments met expectations with their margins. Energy is being weighed down by pricing pressures in wind and thermal generation, while mix shifts and higher R&D are weighing on aviation numbers. This has to get better for multiples to expand.
The Bottom Line
General Electric likely isn't done building itself up; there's plenty left to buy in oil and gas equipment or services, and the company has very low exposure to transmission and distribution relative to its position in generation. There's also ample opportunity to grow the healthcare business and if the company is serious about being a bigger player in life sciences, they will need to build (heavy R&D investment) or buy.
It's worth noting that GE is still largely a late-cycle conglomerate (though it has built it up its non-cyclical businesses) and those are the markets working these days. It's also worth noting that while GE Capital isn't perfectly healthy, it still adds value to the company.
I believe GE's industrial business is worth about $17.50 on the basis of very solid single-digit growth. On the assumption that GE Capital can attain a 10% return on equity (it's in the high single digits now), even a high Bank Of America-esque discount rate suggests its worth about $6 to shareholders. Add that up and GE is very nearly worth a look for investors today, and factoring in the above-average dividend may just tip over that decision.