GE Part VI: Transportation Segment Analysis

| About: General Electric (GE)

Summary

This article offers up a deeper dive into the transportation segment of GE.

GE's transportation segment is compared to Cummins, PACCAR and Caterpillar.

The analysis derives a value of about $43 billion alone for the transportation segment.

Company Background

General Electric (NYSE:GE) is a massive corporation that is more or less eight individual companies operating under one roof. This is part VI of an eight part series taking a deep dive into GE's eight individual operating segments. Please refer to my previous articles investigating GE for further company background.

GE: The Sum Of All Of The Parts

GE Part I: Power and Water Segment Analysis

GE Part II: Oil and Gas Segment Analysis

GE Part III: Energy Management Segment Analysis

GE Part IV: Aviation Segment Analysis

GE Part V: Healthcare Segment Analysis

Company Breakdown

This is part six of diving deeper into each of the eight individual operating units of GE. One method of analysis is to look at each segment individually. The analysis in this article will focus on revenues, profits, growth and opportunities for the Transportation segment. All GE segment revenue and profit numbers for 2010 through 2013 were collected from the 2013 annual report. Data for 2014 was collected from the 2014 third-quarter report.

GE's Transportation Segment

According to the GE Transportation website, the transportation segment "is a global technology leader and supplier to the railroad, mining, marine, stationary power, drilling and energy storage industries". The segment is over 100 years old and was established around both the freight and passenger locomotives. GE developed expertise in both diesel-electric and electric locomotives. The focus today is applying technology to drive efficiency and faster delivery through innovative thinking.

In 2013, the transportation segment had revenues of $5.885 billion and profits of $1.166 billion. Compared to 2012, revenues increased 4.94% and profits increased 13.09%. The effects on revenue in 2013 compared to 2012 were driven by higher volume which was a reflection of acquisitions. The profit increase was a result decreased costs of goods, higher productivity and higher volume. Profit margin increased from 18.4% in 2012 to 19.8% in 2013. This improved profit margin shows operating leverage and gains in operating efficiency. GE was able grow profit at a faster pace than revenue which is a positive sign for continued expansion in profit margin. Similar to the other segments, GE is finding ways to extract higher profits from each dollar of revenue. This improving profit margin is a great sign GE is improving efficiency and not hurting the company.

Estimating future revenue for each segment can easily be accomplished as GE outlines their order backlog for each segment. This is the first segment throughout my deeper dives that was not able to increase orders in 2013. GE reported decreased orders for the transportation segment in 2013, totaling of $5.1 billion. The segment's backlog did increase, standing at $14.9 billion at the end of 2013. The $14.9 billion breaks down to $2.5 billion in equipment and $12.4 billion in services. The backlog at the close of 2012 stood at $3.3 billion for equipment and $11.1 billion for services. Total backlog increased 3.5% from 2012 to 2013, with a 24.2% decrease in equipment and an 11.7% increase in the services backlog.

Through the first nine months of 2014, the transportation segment generated revenues of $4.073 billion and profits of $0.814 billion. Revenues for 2014 decreased 8.0% and profits decreased 8.1%. The chart below shows the growth through the first three quarters of 2013 compared to the first three quarters of 2014. Even though the revenues decreased 8% year over year, the transportation segment was able to maintain profit margin. The profit margin only decreased slightly, falling 0.2%. Ideally this would improve year over year, but with an 8.0% decrease in revenue, holding profit margin steady is quite an accomplishment.

 

Q3 YTD 2013

Q3 YTD 2014

Growth

Revenue

4.425

4.073

-8.0%

Profit

0.886

0.814

-8.1%

Profit Margin

20.0%

20.0%

-0.2%

In 2014, this segment of GE did have revenue generated as a result of acquisitions. The main source of acquisition driven revenue came from the rail software provider RMI. The acquisition closed in December of 2013 and expanded GE's software for railroad customers. The software suite offers "software solutions for railroads, rail shippers, railcar leasing companies and intermodal services in North America." GE made a concerted effort to increase the revenue generated from services and this acquisition is right in line with those efforts. Additionally, GE noted in their 2014 third quarter report that overall backlog increased 21% year over year and services climbed 10%. GE does not break down the backlog to operating segments quarterly, only offering this information in the annual reports. Below is a chart showing revenue, profit and profit margin from 2010 through 2013, all values are in billions for the transportation segment.

 

2010

2011

2012

2013

Δ '10-'11

Δ '11-'12

Δ '12-'13

Ave '10-'13

Revenue

3.37

4.885

5.608

5.885

44.96%

14.80%

4.94%

21.57%

Profit

0.315

0.757

1.031

1.166

140.32%

36.20%

13.09%

63.20%

Profit Margin

9.3%

15.5%

18.4%

19.8%

65.79%

18.64%

7.77%

30.73%

Similar to previous segments, GE has grown the transportation segment organically, through collaborations and acquisition. Some of these acquisitions include the aforementioned RMI in 2013. GE added to their mining group with acquisitions of Inustrea Ltd and Fairchild international in 2012. These acquisitions and partnerships have created a complex segment within GE. One could almost argue that the transportation segment is a conglomerate on its own. While the locomotive division with GE transportation is strong at the moment, the mining segment more than likely saw a drop off in 2014. This is the main appeal behind owning a conglomerate as more often than not the company will have certain divisions that are strong while others are weak. This creates a margin of safety within a company.

The Competition

Let's take a look at how GE compares to the competition in the transportation sector. The three comparisons I selected were Cummins Inc (NYSE:CMI), PACCAR Inc (NASDAQ:PCAR) and Caterpillar (NYSE:CAT). All of the values below were gathered from the company's 2013 annual reports and revenue/profit numbers are in billions.

GE Transportation

         
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

4.885

5.608

5.885

14.80%

4.94%

9.87%

Profit

0.757

1.031

1.166

36.20%

13.09%

24.64%

Profit Margin

15.5%

18.4%

19.8%

18.64%

7.77%

13.20%

             

Cummins

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

18.048

17.334

17.301

-3.96%

-0.19%

-2.07%

Profit

1.848

1.645

1.483

-10.98%

-9.85%

-10.42%

Profit Margin

10.2%

9.5%

8.6%

-7.32%

-9.68%

-8.50%

             

PACCAR

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

16.355

17.05

17.123

4.25%

0.43%

2.34%

Profit

1.042

1.112

1.171

6.72%

5.31%

6.01%

Profit Margin

6.4%

6.5%

6.8%

2.37%

4.86%

3.61%

             

Caterpillar

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

60.138

65.875

55.656

9.54%

-15.51%

-2.99%

Profit

4.928

5.681

3.789

15.28%

-33.30%

-9.01%

Profit Margin

8.2%

8.6%

6.8%

5.24%

-21.06%

-7.91%

GE's transportation segment has the highest revenue and profit growth amongst all the competition. The next closest competitor to GE's 9.87% revenue growth was PACCAR with 2.34% revenue growth. GE's profit growth of 24.64% dwarves the competition as PACCAR is second highest with 6.01%. GE more than quadruples the nearest competitor in both revenue and profit growth. This is impressive considering the competitors are strong established companies operating in similar markets. When looking at profit margin, again GE is the clear winner. GE has the highest profit margin as well as the strongest profit margin growth over the time period analyzed. When comparing the transportation segment of GE to the competition, some generalizations can be made:

  • GE is clearly be the cream of the crop
  • GE and PACCAR both offered positive growth in all three analyzed areas
  • CAT and CMI both struggled over the time period analyzed

As the financials show opportunities exist for GE in the transportation sector. I would expect GE to continue investing strongly in this space. GE transportation appears to be firing on all cylinders compared to the competition and should carry a premium valuation.

One thing to keep in mind is the transportation segment is only a small piece of the GE total P/E. Based on 2013 revenues, the transportation segment is only 4% of the overall company. Below is each company's P/E ratio from Google Finance at the time of this analysis.

 

P/E Ratio

GE

16.77

CMI

15.83

PCAR

18.56

CAT

14.64

Considering the analysis above, GE's transportation segment is the cream of the crop when compared to the three companies chosen. Over the last three years, GE's transportation segment has thrived while the competition has struggled to keep up.

Valuing the Transportation Segment

As done in my initial article, GE: The Sum of All of the Parts, I just took the average of the competition and estimated the value of this segment. According to FactSheet, the earnings expected in 2014 for the S&P 500 are $128.57, giving the market a multiple of 16.09 as of market close on Monday, November 24, 2014. Utilizing these numbers, an average stock should trade at the market multiple. I feel that based on the growth rate of the transportation segment, GE Transportation should trade at a premium to the market multiple. When valuing a growth company, I like to apply a P/E of 1.5x the growth rate. Multiplying GE's transportation segment's growth rate of 24.64% by 1.5, the calculated multiple is 36.96. Applying the multiple of 36.96 to GE's 2013 segment profit of $1.166 billion, the transportation segment can be estimated to a value of $43.10 billion. The $43.10 billion is more than double the estimate of $21.2 billion suggested in the original analysis. The previous analysis just valued the company based on the industry the company operated without considering other factors.

Conclusion

GE is a very complex company operating in eight different segments. An overall estimate for GE can be made by evaluating each individual segment as a standalone company. Comparing GE to the competition, we see that GE is showing strong growth compared to the competitors selected. Based on the financials for GE's transportation segment, I feel this segment should at a premium to the market multiple. We are able to estimate that the transportation segment is contributing $43.10 billion of the overall $271 billion value of the total company. Comparing this segment to others within GE, the transportation segment appears to be one of the gems within the overall company.

Please see the Company Background section above for links to Power & Water, Oil & Gas, Energy Management, Aviation and Healthcare segment analysis articles. Please continue watching Seeking Alpha for the upcoming analysis of Appliance & Lighting and GE Capital.

Disclosure: The author is long GE, CAT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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