In this research note, we'll take a look at General Electric (GE). General Electric is in the industrial goods sector and recently reported third-quarter earnings. We'll cover the third quarter and update the investment recommendation.
Third-quarter revenue missed the average analyst estimate as the decelerating global economy eroded demand for equipment from medical scanners to jet engines. General Electric reported 7 cents in pre-tax profit and earnings. Pre-tax profits were $4.03 billion in the third quarter and revenue was $36.3 billion. The slower-than-expected revenue growth was a result of GE Capital shrinking faster than planned: The firm is reducing its reliance on financial services. GE Capital contributed to 44 percent of pre-tax profit.
Orders for wind turbines declined because of fears the critical tax credit won't be renewed. Revenue from the industrial business declined to $21.5 billion, although, excluding wind and currency effects revenue increased.
At Thursday's close, GE climbed 41 percent over the past year outpacing the Dow Jones industrial average's 22 percent gain. GE said it has bought back $3 billion worth of shares so far this year.
Among GE's operating segments, energy infrastructure had the largest revenue growth with a 12 percent increase in the quarter. In 2010 and 2011, Immelt invested $11 billion in the business, mostly in the oil and gas sector.
GE planned to reduce the size of GE Capital to $425 billion by year-end, but achieved that level in the third quarter. A smaller business will deliver less revenue. GE's industrial business is expected to increase revenue 5-10 percent in 2013.
GE competes with United Technologies Corp. (UTX), Siemens AG, and Alstom SA.
GE's valuations are near a short-term peak: the firm is overvalued on a short-term multiplier model valuation basis. On an absolute basis, the multiplier model valuations are within the normal valuation ranges. The price-earnings multiple is 18.4 and the price-sales multiple is 1.66. A 10-20 percent decline in the multiplier model valuations may be a good buy zone. However, valuations may decline more depending on market conditions.
Labor Department figures showed more Americans than forecast filed applications for unemployment benefits last week, reflecting an unwinding of adjustments for seasonal swings at the start of the quarter.
The U.S. leading economic indicators rose in September by the most in seven months, boosted in part by a jump in permits for home construction that's helping underpin the expansion.
Manufacturing in the Philadelphia region expanded in October for the first time in six months, a sign the industry may be starting to stabilize.
Overall, the economic data has been better than expected the past several weeks; that suggests the economic data may weaken in the weeks to come.
Of the 116 companies on the equity benchmark that have reported since October 9, 80 have posted earnings that exceeded analyst estimates.
GE's financial performance and position are good. The firm invested heavily in oil and gas and that is paying off for the firm. Also, GE outperformed the Dow Jones industrial average over the last year. At this point, long equity investors should reduce the size of their equity holding as markets may be due for a correction. That said, I will increase my GE long equity position during a period of economic uncertainty and a decline in the share price.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.
Disclosure: I am short SPY.