General Electric: Transformation Phase From GE Capital To Energy Limits Medium-Term Upside

| About: General Electric (GE)
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Shares of General Electric Company (NYSE:GE) fell more than 3.4% in Friday's trading session. The diversified industrial conglomerate reported its third quarter results. General Electric's disappointing third quarter revenues, accompanied with other weaker corporate results, sent equity markets deep into the red on Friday.

Third Quarter Results

General Electric reported third quarter revenues of $36.3 billion, up 3% on the year. Excluding foreign exchange effects, revenues rose some 6%. Revenues fell short of analyst expectations of $36.95 billion.

Industrial sales rose 7% to $24.7 billion, driven by the strength of the energy business. GE Capital's revenues fell 5% to $11.4 billion, as General Electric aims to reduce the assets of the division.

Operating earnings rose 10% to $3.8 billion. Operating earnings per share rose 13% to $0.36 per share. GAAP earnings came in at $3.5 billion, or $0.33 per share. Earnings missed analysts estimates by three cents.

GE's order backlog rose to a record $203 billion, or 1.3 times annual revenues. The company's simplification efforts boosted operating margins by 70 basis points. Industrial orders rose 4%, excluding the impact of the wind turbines, to $21.5 billion. The company remains on track to boost operating margins by 100 basis points as the company targets to save $2 billion in structural costs.

CEO and Chairman Jeff Immelt commented on the results:

"The overall environment remains challenging, but GE continues to execute to our growth strategy. GE's Industrials segments delivered another quarter of strong organic revenue growth, and we ended the quarter with a robust backlog. As expected, our margins increased 70bps over the prior year period, with margin expansion in all five industrial segments. We are focused on delivering our key commitments to investors including balanced double-digit earnings growth, strong organic growth, margin expansion, and returning cash from GE capital to fund balanced capital allocation for our shareholders."

Segmental Information

GE's industrial segment reported a strong revenue growth of 12% to $12.18 billion. Segment profits rose 13% to $1.70 billion. Orders fell 17% to just $6.5 billion, driven by a 72% decline in orders for wind turbines. Service revenues fell 8% to $3.1 billion.

Aviation revenues fell 1% to $4.78 billion. Despite stagnation in revenues, segment profits rose 7% to $924 million. Aviation orders fell 8% to $5.2 billion, as a result of a tough comparison in commercial engines.

Healthcare revenues fell 1% to $4.31 billion, while segment profits rose some 2% to $620 million. Orders fell 1% as well to $4.6 billion, mainly as a result of unfavorable exchange rates.

The transportation division reported a decent 9% revenue growth to $1.41 billion. Segmental profits rose 35% to $265 million. Transportation orders rose 21% to $1.2 billion, driven by higher international locomotive orders.

Home & Business solutions revenues rose a percent to $2.12 billion. Segment profits improved to $61 million.

GE continues to cut back on GE Capital's business. Revenues fell 5% to $11.37 billion. Despite the fall in revenues, segment profits rose 11% to $1.68 billion. Lower margin impairments, were partially offset by higher credit costs and a lower asset base.


At the end of the third quarter, General Electric held $134.2 billion in cash and equivalents. The company operates with $431.5 billion in borrowings as a result of GE Capital.

For the first nine months of the year, General Electric generated revenues of $108.0 billion. The company reported a net income of $9.6 billion, or $0.91 per diluted share. General Electric guides for full year revenue growth of 3% to $151 billion. Previously, the company guided for a 5% growth in revenues. Net income could come in around $13 billion, or $1.30 per share.

The market values General Electric at $233 billion. This values GE at 1.5 times annual revenues and 18 times annual earnings.

Currently, General Electric pays a quarterly dividend of $0.17 per share, for an annual dividend yield of 3.1%.


Year to date, shares of General Electric have returned some 23%. Shares started the year at $18 per share and steadily rose to $23 in recent weeks. After Friday's fall, shares are exchanging hands at $22 per share.

Over the past five years, shares of General Electric have lost roughly half of their value. Shares fell from $40 at the end of 2007, and declined to lows of $6 in 2009 after the market feared GE Capital could bankrupt the company. Shares quickly recovered and have traded around the $20 mark in recent years.

Between 2008 and 2012, the company shrank in size, with GE cutting back on GE Capital's activities. Total revenues fell from $181.6 billion in 2008, to an expected $151 billion this year. Net profits fell from $17.4 billion in 2008 to an expected $13 billion in 2012.

General Electric continues to transform its massive operations. The company is paring its GE Capital activities by some 10% at the moment, ahead of the scheduled 5%. At the same time, GE is focusing on its energy division within the industrial segment. The company has made significant investments by means of acquisitions in the area to take advantage of the drilling boom in the US in natural gas and oil.

While the transformation and simplification of the industrial conglomerate is good for all the stakeholders involved, including shareholders, the firm fails to create a lot of value in the meantime. While the industrial segment is doing well, driven by the energy segment, total revenues are stagnant as GE Capital is slowly being pared down. Shareholders should not expect spectacular returns in the short to medium term, but do get a nice 3.1% dividend yield during the transformation period.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.