General Electric (NYSE:GE) and Honeywell (NYSE:HON) are tied to the energy markets, and we had thought the fourth quarter would be challenging for the industrial conglomerates in light of declining crude oil prices and general weakness in commodity prices, almost across the board. The reality, however, is that both GE and Honeywell navigated the tumultuous energy and commodity-price environment extremely well, registering solid fourth-quarter results January 23. We plan to continue to hold GE in the newsletter portfolios for the foreseeable future.
Revenue and industrial segment profit in GE's fourth quarter jumped 4% and 9%, respectively, with 6 of its 7 business segments growing earnings in the period. Industrial segment organic revenue leapt an impressive 9%, which is strong for any company, but for one of GE's size, the pace of internal expansion is fantastic. The industrial giant noted that fourth-quarter margins advanced 50 basis points thanks in part to the company's ongoing focus on reducing industrial structural costs. Fourth-quarter GAAP EPS from continuing operations jumped 6%, to $0.52 per share.
It's hard not to like GE's strong cash flow generation, and management noted that its oil and gas business, our primary concern heading into the quarter, was only modestly weak. In its oil and gas division, for example, orders fell just 4% and revenue was flat on an organic basis. GE's path to its 2016 transformation remains on track, and the company's $261 billion backlog at the end of 2014 will offer strong top- and bottom-line support. Annualizing GE's fourth-quarter GAAP earnings indicates the company is trading at just 12 times. The company's yield is very healthy at nearly 4%.
Image Source: General Electric
Honeywell's fourth-quarter results were equally strong. Organic sales growth was 4% in the fourth quarter, and the industrial conglomerate registered 110 basis points in operating income margin improvement, excluding certain pension items. Adjusted earnings per share leapt 15% in the quarter, as both cash flow from operations and free cash flow advanced 6%. The results for the period exceeded the high end of its guidance range, showcasing the firm's resilience in the face of not only difficult commodity markets but an overall uncertain global economy.
Looking ahead, Honeywell pointed to its balanced portfolio mix of short- and long-cycle businesses as the primary reason why the company is well-positioned to deliver higher organic sales, continued margin expansion, and double-digit earnings growth in 2015. CEO Dave Cote also indicated that its five-year plan is on target, and given the strength in the fourth quarter in the face of an extremely volatile business climate, management's credibility is solid. Organic revenue is expected to climb 4% in 2015, driving 7%-11% growth in adjusted earnings per share, buoyed by as much as 190 basis points of operating income margin expansion. Free cash flow of $4.2-$4.3 billion will be 8%-10% higher than that of 2014.
We were quite surprised at the strength of these two industrial bellwethers in the fourth quarter, and their outlooks for 2015 are quite encouraging in that the executive suites have factored in weak commodity-price markets. We like GE both in the context of our coverage universe and relative to Honeywell, though we don't necessarily dislike the latter. Not only is GE trading at a bargain-basement valuation, but it is de-risking its business model as it pays a very healthy ~4% dividend yield. The sell-side will eventually come around on GE's shares. The majority of analysts appear to have a 'hold' rating on the firm.
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