What do an Evolution Series Locomotive, an Optima PET/CT scanner, a CF34 turbofan engine and a GeoSpring water heater all have in common? They're all products made by one of the largest conglomerates in the world, General Electric Corporation (GE). It's difficult, frankly, to find a sector in which GE does not compete or have some exposure. But recently, especially after their third quarter 10-Q, it seems I'm reading more negative articles than I expected. Is it responsible reporting or an overreaction? I decided to dig through the conference call and pull out all the negative news I could find. If nothing else it should tell us whether the recent criticism is warranted.
First off, GE missed their third quarter revenue estimates. $36.3 billion compared to the consensus estimates of $36.9 billion. Earnings of $0.36 per share came in right at the estimates, but was down from $0.38 last quarter. GE Capital reported a revenue decline of 5%, down to $11.4 billion. Infrastructure orders were down 5%, mostly due to declining wind turbine sales. Revenue from their Aviation division declined $74 million from the second quarter, and was $54 million lower than a year prior. They only shipped 25 of their flagship GEnx engines this quarter compared to 28 last year (don't forget this new engine that powers the Boeing 787 and 747-8 has been plagued with issues including one catastrophic failure and a loss of power on takeoff. Here is what the NTSB has to say.) Shifting to their healthcare division, revenues decreased by about 4.5 percent of $193 million from the second quarter. Profits were also down from the second quarter.
And then there's Jeff Immelt. Some of his comments in the Q & A session left analysts and investors with a feeling of uncertainty. "Europe's going to be a grind. We're not assuming that Europe gets any better... So I think we're looking at '13 being kind of like '12 with the big variable being the fiscal cliff and we're ready if it doesn't go through, but we're kind of making the same assessment most people do, that somehow it gets resolved."
Yikes. If you only read the above you may think GE was floundering in the doldrums.
Some of the bright spots: The revenue miss was only about 1.5%. Third quarter earnings were up 13%. Both Industrial Solutions and GE Capital had double digit earnings growth. GE Capital also paid a $2.4 Billion dividend to the parent company, almost $400 million more than analysts expected. All Industrial sectors also saw positive earnings growth for the first time since 3Q 2005, with huge earnings growth in Oil & Gas (+18%) and Transportation (+35%). The largest gains came from emerging markets and the lowest were, not surprisingly, from Europe and the US. The Aviation unit may have had a tough quarter on paper, but also had $500 million in order pushouts which would have made the numbers look much better. I have no doubts that the CFM Leap will soon become one of the most popular engines in the world, providing a solid revenue stream for many years. Overall projections for fourth quarter and 2013 remain unchanged, which include an earnings increase of 13%.
The dividend yield currently sits at 3.2% at a closing share price of 21.26 on Oct 25th, higher than the DOW average yield of 2.9%. Right now their payout ratio is sitting at 50%, below their historical average of nearly 56%. By the end of the third quarter the company had raised $10.7 billion. All of these facts coupled with the $5.4 billion that GECC has returned this year bodes well for a future dividend raise. GE has also bought back $3 billion worth of shares in 2012.
As far as valuation, after the recent share drop I'd classify shares to be a good value at around $21. Trailing P/E at this price puts them around 16.5, which is higher than the often compared United Technologies (UTX), though I think the parallels are loose. If the trailing P/E sat at 15%, equating to a share price of $19.45, I would consider GE a strong buy. The yield at that point would be 3.5%, with a strong chance of going higher.
While some of the criticism of GE management may be warranted, especially going back a few years, I don't feel the company is as overvalued as some have suggested. With exposure to growing emerging markets, new technologies, oil & gas equipment, a leaner GE Capital business, rail, aviation, healthcare and consumer products. The sun never sets on GE. Ok, that may be a bit melodramatic. But now with a stronger balance sheet and a slowly rebounding global economy this may be an excellent time to accumulate shares at a nearly 8% discount to the highs of early October. If there is a further pullback under $20 I'll be adding to my position as well.
Disclosure: I am long GE.