Transcript of earnings call found here.
On Thursday I published an article discussing things GE investors, and investors across the board would be watching for, in the third quarter earnings and earnings call from General Electric. At 6:30 this morning General Electric released earnings, so now investors have a chance to pour over the numbers and figure out what it really means. As discussed in the earlier article, I saw four things that investors should be watching closely: Top and bottom line numbers, margin improvement or deterioration, performance of GE Capital, and economic outlook/full year guidance from management. This article will discuss how the earnings report reflects on each of these topics with an additional look at the industrials unit.
Top and Bottom Line Numbers
The headline numbers are out, and investors were left a bit underwhelmed. For Q3 2012, GE reported EPS of $0.36, which was inline or a miss of $0.01 depending upon whose estimates you looked at. Revenue for the quarter came in below expectations (~$600 million miss) at $36.3 billion. Looking beyond the immediate headline numbers though investors can see some of the true strength in this company, and its stock. The earnings per share growth seen this quarter (13% increase), represented the tenth consecutive quarter of operating earnings increases. Although revenue missed analyst estimates it still increased 3% year over year, and excluding the impacts of foreign exchange rates, revenue would have been up 6%. The miss in total revenue should not come as a great surprise, as investors have seen American companies across the board seemingly miss on revenue as exchange rates and a strengthening dollar have impacted revenue. According to GE, revenue took a $1.1 billion bite out of Q3 revenue.
Next of interest to investors are GE's margins. As CEO Jeffrey Immelt said during the Q2 earnings call "…Margins are improving and we are on track for margin growth starting in the third quarter for 2012 and 2013." Results in Q3 2012 showed that he was exactly right. GE stated that margins have improved 70 basis points year on year, with increases across all industrial segments. During the Q2 earnings call, management stated that they anticipated margin expansion to be in the range of 30-50 basis points during 2012, and it seems they may actually be a bit ahead of schedule on this front. GE says that simplification has helped reduce costs, and corporate cost reduction efforts are expected to save the company approximately $2.8 billion over FY 2012.
It appears that the focus and emphasis that GE has placed on the industrial business over the past few years is paying off. Industrial revenues grew 6%, with organic growth of 8%. Also, all industrial segments posted earnings growth for the first time since the third quarter of 2005. Energy Infrastructure, Transportation, and Home and Business Solutions were particular bright spots for the company, delivering double digit earnings growth. In particular, GE's industrials showed strength, and double digit growth in emerging markets of China, Latin America and Africa.
In the earlier article, I said, "As long as GE Capital shows it has not deteriorated, investors should be happy with results from the unit. GE anticipates seeing mid-single digit growth within GE Capital for 2012, and the immediate future."
The results from GE Capital are in. For the third quarter of 2012, GE Capital earned $1.7 billion, an 11% increase from a year prior, on revenue of $11.3 billion (5% decrease, on lower assets). In the earnings release, Mr. Immelt made a statement that GE Capital is "…on target to become a smaller, more focused financial services business with solid earnings." That statement appears to be accurate, as the GE Capital revenue made up just 31% of GE's total revenue for the quarter. During Q3, GE Capital made a $2.4 billion dividend payment to the parent company, and year to date has paid GE a total of $5.4 billion in dividends. The results from GE Capital Corporation (GECC) have delivered to investors what they wanted to see. The unit has shrunk as a portion of the company, but profitability and earnings for the unit continue to grow. GE Capital appears to be ahead of schedule in many ways, and the cash returned by GECC is being used to, in Immelt's words, "…fund balanced capital allocation for our shareholders."
As I have said before, GE is a global stock and can be looked at as an indicator for the global economy. GE management re-affirmed full year guidance, and made no changes to the outlook. The company expects to deliver double-digits earnings growth for FY2012, but did state that a great deal of uncertainty remains in the global economy and the company is prepared/preparing for the various economic outcomes.
Overall, I believe that GE reported a strong third quarter. While top and bottom line numbers fell slightly short of what analysts had initially hoped for the underlying growth and fundamentals remain in place. The company has produced $10.7 billion from operations during the first 9 months of the year, an increase of 63% from the $6.5 billion generated during the same period in 2011. The company also currently holds more than $80 billion of cash and cash equivalents on the balance sheet. GE is working to hold costs down while investing in the continued growth of the company.
Even though I believe the earnings report was relatively strong, investors have initially looked upon the results less kindly. Following the announcement, shares were down 1.8% during pre market trading. Based on that decrease, shares can be purchased for $22.40, giving the shares a TTM P/E of 15.2. I said yesterday that I would be buying shares if they dropped near $22.25, and I believe that still holds. Investors should begin looking closely at GE at $22.35, which would give shares a TTM P/E of 15. With a dividend yield just north of 3%, strong earnings growth, healthy revenue, global exposure, and plenty of room for dividend growth, GE makes a great long term investment.