General Electric (GE) operates as a technology and financial services company worldwide. The company has a market cap of $224 billion, and its stock price is around $21. GE reported third quarter earnings on October 19th. The company reported revenues of $36.35 billion which was a 3% increase from revenues of $35.3 billion in the third quarter of 2011. Analysts had predicted revenues of $36.95 billion. Net income was $3.49 billion. The company had earnings per share of $0.33 which was a 49% increase from earnings per share of $0.22 in the third quarter of 2011.
Positive news came from GE's industrial unit which grew revenues at a rate of 6%. GE's industrial unit is made up of five segments: aviation, healthcare, transportation, energy, infrastructure, and oil & gas. During the third quarter earnings call, GE's CEO Jeffrey Immelt said "Every industrial business had positive earnings growth for the first time since the third quarter of '05."
The two brightest spots for the company were in GE's aviation and its energy infrastructure divisions. The aviation unit had a profit of $924 million which was a 7% increase from the third quarter of 2011. This unit whose primary source of revenues comes from the sale of jet engines has seen a 150 basis point increase in operating margins and depending on the engine type it has a two to seven year order backlog. The company's energy infrastructure unit increased earnings by 13%. This division has taken advantage of increased drilling for oil and natural gas. Both offshore drilling and onshore drilling in shale formations have increased dramatically.
GE capital also showed earnings growth. During the third quarter, GE Capital earned $1.7 billion, on revenues of $11.3 billion. The $1.7 billion in earnings was a 5% increase from 2011. During the earnings release, Jeffrey Immelt commented on GE's efforts to reduce the size of GE Capital. Mr. Immelt said GE Capital is "…on target to become a smaller, more focused financial services business with solid earnings." That statement seems to be accurate, because revenues from GE industrial unit were more than double that of its GE Capital unit.
Another area of growth that GE can look forward to is its overseas growth markets. "Growth markets expanded by 9% including in China, up 23%, Africa up 22% and Latin America up 21%; we expect six of nine growth regions to have double-digit order growth at '12."
Jeffrey Immelt also touted the companies increased cash flow. Mr. Immelt said, "Cash is a decent story with year-to-date total of $10.7 billion, up 63%." GE's balance sheet now shows cash and equivalents of $134 billion. Mr. Immelt also spoke about balance sheets: "GE's balance sheet also showed strong improvements in its operating margins which were up by 70 basis points to 14.4%. GE had margin increases in every business, including Energy if you exclude the impact of our Wind business."
GE's worst performing business was its Wind energy business. Orders for the wind energy business fell by 5% from last year; this was primarily because a key U. S. federal subsidy for wind power will expire at the end of the year. Jeffrey Immelt said GE is assuming "no market" in the U.S. for wind turbines next year without the subsidy. He expects wind revenue to fall 40% next year and cost the company 3 cents per share in earnings.
Recent News About General Electric Company
On October 23rd, General Electric refinanced $5B worth of bonds that mature in February in order to minimize any impact from the fiscal cliff, if it's not averted. "If it's choppy, we are prepared," CFO Keith Sherin said. The conglomerate used part of the $7B worth of bonds it raised earlier this month for the refinancing.
On October 19th, we learned that GE's Q2 investor presentation did indeed show a full-year forecast of about 5% growth, while the Q3 presentation takes it down to about 3%. Asked about this on the conference call, Jeff Immelt says the reduction is coming from GE Capital.
On October 19th, the company - in the presentation materials for its earnings conference call - lowered its full year revenue growth estimate to about 3% from a previous 5%. Given the year is almost over, it implies GE is expecting below-forecast results for Q4.
On October 7th, the Financial Stability Oversight Council put GE Capital in the third and final stage of a review to determine whether the firm should be designated as systemically important, and therefore subject to increased scrutiny and regulation, Bloomberg reported. American International Group (AIG) is so far the only other non-bank in the final phase.
GE's third quarter earnings were pretty much in line with analyst expectations, and its revenues missed by less than 2%. Unfortunately, the company reduced its 2012 revenue projection from a 5% annual increase to a 3% annual increase. The reason that the company will see lower revenues is because GE Capital's revenues will fall by 10%. As a result of the lower revenue forecast, GE's stock price dropped by 3.5% on the day of the announcement, and over the next two days, the stock price dropped by an additional 3.7%.
GE's stock moves within a range, and I cannot foresee the day when GE's stock price will exceed $27. Its stock performs like those of other large companies like Microsoft (MSFT) or Intel (INTC). These stocks trade in a limited range and have low Beta's and pay good dividends. Investors either buy and hold these stocks or buy them at the low end of their 52 week trading range, and then sell them when they are at the high end of their trading range. Even after the recent hit to its stock price, GE is still near the high end (52 week range $14.68 -$23.18) of its trading range. I think that GE could be a good core holding for a conservative investor, but I would not buy the stock until its stock price dropped below $19.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.