GE's Q1 Operating Earnings Beat by a Whisker - Analyst Blog

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Diversified conglomerate General Electric Company 's ( GE ) first quarter 2014 results were a mixed bag as although operating earnings decreased year over year, it marginally exceeded the Zacks Consensus Estimate by a penny. Operating earnings for the reported quarter declined to $3.3 billion or 33 cents a share from $4.1 billion or 39 cents a share in the year-ago quarter. The decrease in year-over-year earnings was primarily attributable to high restructuring charges of the company to focus on industrial manufacturing roots and reduce dependence on the financial sector to ease credit risks.

Excluding one-time items, adjusted operating earnings for first quarter 2014 were 36 cents per share compared with 33 cents in the year-earlier quarter. On a GAAP basis, the company reported quarterly earnings of $3.0 billion or 30 cents per share compared with $3.5 billion or 34 cents in first quarter 2013.   

Revenues

Revenues for the reported quarter declined 2% year over year to $34.2 billion and fell short of the Zacks Consensus Estimate of $34.8 billion. While overall Industrial segment revenue increased 8% to $24.5 billion, GE Capital revenue dropped 8% year over year to $10.5 billion. The decrease in GE Capital's revenue was in accordance with the corporate strategy to lower top-line growth from the financial unit.

The company received strong orders during the quarter across the globe. Orders from growth markets were up 7% as five out of nine regions witnessed double-digit revenue rise. While Services revenues were up 3% with double-digit growth in Aviation and Oil & Gas, Equipment revenues grew 12% on new product initiations and solid share positions. Total backlog of equipment and services at quarter-end reached $245 billion with year-over-year improvement in each segment.

During the reported quarter, Transnet placed an order for 233 advanced Evolution Series locomotives for approximately $0.7 billion. Air France-KLM also selected 37 GEnx engines (valued at $1.7 billion at list price) for 787 Dreamliners manufactured by The Boeing Company ( BA ).

Revenue by Segment

During the reported quarter, Oil & Gas revenues improved 27% year over year to $4.3 billion, while Energy Management revenues decreased 4% to $1.7 billion. Revenues from both Aviation and Power & Water segments climbed 14% each year over year to $5.8 billion and $5.5 billion, respectively.

Healthcare segment revenues declined 2% to $4.2 billion. Revenues from Appliances & Lighting were down 3% year over year to $1.8 billion. Revenues from the Transportation segment also decreased 14% year over year to $1.2 billion.   

Revenues from the GE Capital segment declined 8% year over year to $10.5 billion as the company continued its strategy to reduce the overall size of its portfolio while focusing on core growth. GE Capital paid $500 million as first quarter dividend to parent General Electric. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $374 billion at quarter-end. GE Capital finished the quarter with a Tier 1 common ratio of 11.4% with net interest margin at 4.9%.

During the quarter, General Electric filed an initial public offering (IPO) of its North American consumer lending unit to shrink its finance business by 2015. The strategic move is arguably the biggest step in restructuring GE Capital's portfolio to shield the parent company from intense market volatilities that plagued the market during the 2008-09 financial crisis. The spin-off will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as medical equipment and scanners.

Margins, Balance Sheet and Cash Flow

With the spin-off, General Electric expects operating earnings from its industrial business to aggregate 70% of the total operating earnings of the company by 2015. The company is currently on track to achieve its goal of $1 billion cost-cuts in the year. During the quarter, General Electric was able to reduce industrial structural costs by $254 million versus the prior-year period, driven by simplification initiatives and benefits from restructuring investments.

Operating profit in the Industrial segment increased 12% to $3.3 billion with cost productivity while GE Capital profit remained flat year over year at $1.9 billion. General Electric's total segment profit for the reported quarter increased 7% year over year to $5.2 billion, with a rise in profits from Oil & Gas (up 37%), Power & Water (up 24%), and Aviation (up 19%), partially offset by a considerable decline in profits in the Energy Management segment (down 67%), Appliances & Lighting (down 33%), and Transportation (down 24%).

Cash generated from operating activities for the quarter was $1.7 billion. Cash and marketable securities at quarter end aggregated $132.7 billion. General Electric returned $3.4 billion to investors during the quarter through dividend payouts and buybacks. General Electric also announced $2 billion worth of acquisitions in the reported quarter.

Outlook

With a focused and dedicated execution of its strategic plans as reflected in solid first quarter results, General Electric expects to continue its bull run in 2014 with an unchanged framework and simultaneously benefit the shareholders with a healthy return on investments. The company has exited from the media 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.

Moving Forward

Driven by relatively strong quarterly results that exceeded expectations, market sentiments appear to be positive. Share prices were on its way up in pre-market trading as investors reacted positively on a strong outlook and focused approach to realign the corporate structure to a manufacturing-based entity.

General Electric presently retains a Zacks Rank #3 (Hold). Other companies in the industry that warrant a look include Bunzl plc ( BZLFY ) and Crane Co. ( CR ), both of which have a Zacks Rank #2 (Buy).



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: IPO , BA , BZLFY , CR , GE

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