GE Q4 Operating Earnings Beat on Sustained Industrial Focus - Analyst Blog

Sustained focus on core industrial business enabled General Electric Company (GE) to report strong fourth quarter 2014 results, with solid industrial segment profit growth and margin expansion. Operating earnings for the reported quarter improved to $5.6 billion or 56 cents a share from $5.4 billion or 53 cents a share in the year-ago quarter.

The increase in year-over-year earnings was primarily attributable to top-line growth. Operating earnings for the reported quarter marginally exceeded the Zacks Consensus Estimate by a penny.

On a GAAP basis, the company reported quarterly earnings of $5.2 billion or 51 cents per share compared with $3.2 billion or 32 cents in fourth-quarter 2013.   

For full year 2014, General Electric reported operating earnings of $16.7 billion or $1.65 per share compared with $16.9 billion or $1.64 per share in the prior year period. Operating earnings for the reported year exactly matched with the Zacks Consensus Estimate. On a GAAP basis, net earnings were $15.2 billion or $1.50 per share in 2014 versus $13.1 billion or $1.27 per share in 2013.

Revenues

Total revenue for the reported quarter increased 4% year over year to $42.0 billion and fell short of the Zacks Consensus Estimate of $42.4 billion. While overall Industrial segment revenue increased 6% year over year to $31.8 billion, GE Capital revenue climbed 4% to $11.5 billion. Organic revenue growth for the industrial segment aggregated 9% for the quarter and 7% for full year 2014 to $32.2 billion and $108.0 billion respectively. Total revenue for 2014 improved 2% year over year to $148.6 billion.

The company received strong orders during the quarter across the globe as total orders increased to $31.5 billion from $30.7 billion in the year-earlier quarter. Total backlog of equipment and services at quarter-end reached a record high $261 billion.
    
Revenue by Segment

During the reported quarter, Oil & Gas revenues declined 6% year over year as expected due to macroeconomic headwinds to $5.0 billion, while Energy Management revenues decreased 2% to $2.0 billion. Revenues from Aviation and Transportation segments climbed 4% and 8% year over year to $6.4 billion and $1.6 billion, respectively.

Both Power & Water and Appliances & Lighting segment revenues were up 22% and 5%, respectively, to $9.4 billion and $2.3 billion. Revenues from the Healthcare segment remained flat year over year at $5.1 billion.   

Revenues from the GE Capital segment increased 4% year over year to $11.5 billion. For full year 2014, GE Capital paid $3.0 billion in dividends to parent General Electric. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $363 billion at quarter-end, down 5% year over year. GE Capital finished the quarter with a Tier 1 common ratio of 12.7% with net interest margin at 5.0%.

In order to focus more on its core industrial businesses, General Electric has keenly continued with its strategic restructuring initiatives. The company is actively pursuing the sale of its GE Money Bank AB (Nordics) consumer finance business to Spain’s Banco Santander, S.A. (SAN). The biggest bank of Spain agreed to acquire GE Capital's consumer finance business in Sweden, Norway and Denmark, for about $953 million.

The transaction, announced in late June, is making good headway in terms of regulatory approvals. In addition, General Electric is further planning to divest its ownership stake in Polish Bank BPH SA. The diversified conglomerate has about 89% stake in Bank BPH.

Margins, Balance Sheet and Cash Flow

The company exceeded its goal of $1 billion cost-cuts in the year with simplification initiatives resulting in $1.2 billion in Industrial structural costs in 2014. The company reported strong margin expansion of 50 basis points in the quarter as six of seven businesses showed positive margin growth.

Operating profit in the Industrial segment increased 9% to $6.0 billion with cost productivity while GE Capital profit declined 19% year over year to $1.9 billion. General Electric’s total segment profit for the reported quarter increased 1% year over year to $7.9 billion, with a rise in profits from Appliances & Lighting (up 32%), Transportation (up 13%), Power & Water (up 13%), and Aviation (up 12%), partially offset by a decline in profit in the Healthcare segment (down 4%).

For full year 2014, cash generated from operating activities was $15.2 billion, with $12.2 billion generated from industrial activities. Cash and marketable securities at year-end 2014 aggregated $138.1 billion compared with $132.5 billion in the prior year. General Electric returned $11 billion to shareholders during the year.

Outlook

With a focused and dedicated execution of its strategic plans as reflected in solid fourth quarter results, General Electric expects to continue its bull run in 2015 with an unchanged framework and simultaneously benefit the shareholders with a healthy return on investments. The company continues to expect double-digit Industrial operating EPS growth; 2%–5% industrial segment organic revenue growth; margin expansion; a smaller GE Capital; $12–$15 billion in free cash flow including disposal of non-core assets; and over $10 billion returned to shareowners. At the same time, General Electric expects to achieve 75% of total earnings from Industrial by 2016.

The company has started its exit from the financial business and has increased its investments in core industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. General Electric also remains focused on its stringent cost-cutting measures. We remain encouraged with these endeavors of the company. However, shares remained flat in pre-market trading following the release as investors probably expected a healthy beat.

General Electric currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth a look include Federal Signal Corp. (FSS) and Textron Inc. (TXT), both carrying a Zacks Rank #2 (Buy).

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