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GE Seeks To Maintain Its Margin Expansion Momentum In 2014 Through Cost Cuts

Posted
12/23/2013 1:13:00 PM
By: Trefis
Referenced Stocks:BA;GE;UTX

General Electric ( GE ) announced at its recent annual investor outlook meet that it will continue to cut costs through 2014, in an attempt to raise margins and profits. This year, the industrial conglomerate is already on its way to slash structural costs by around $1.5 billion on gains from multiple cost reduction initiatives. The company plans to continue these initiatives through 2014, to take out an additional $1 billion in structural costs next year. Among the major measures adopted by the company to cut costs is consolidation of production facilities which allow for greater sharing of common resources. Next year, GE also plans to cut down on the number of internal ERP systems it supports and the number of profit & loss statements it generates to save on administrative costs. In all, in 2014, through these measures the company anticipates to lower its selling, general and administrative (SG&A) costs to 14% of sales, from over 15.5% currently. Eventually, driven by these cost controls GE targets to lower its SG&A costs to 12% of sales by 2016.

We figure these cost cutbacks will play a crucial role in helping GE retain its margin expansion momentum in 2014. The company appears set to lift its industrial segment margins by 70 basis points in 2013 from 15.1% in 2012, and we figure these planned cost cuts will help expand its margins further in 2014 to lift profits. Higher industrial profits driven by this margin expansion will also help GE fill the gap that will be created next year by the planned divestiture of its North American retail financing unit. (See GE trims its retail lending unit to intensify focus on industrials )

Separately, GE's macro environment in 2014 is also likely to improve from 2013, driven by continued strength in the U.S. economy and strong growth from the emerging markets, partially offset by weakness in the mining industry and stagnation in Europe. The company's guidance for its 2014 organic sales growth also belies this trend. GE anticipates growth in its industrial organic sales to accelerate to 4-7% annually in 2014, up from 2% year-over-year organic growth likely in 2013. Additionally, earlier this year in October, GE also reported a record backlog of $229 billion at the end of the third quarter, up from $210 billion at the beginning of 2013. We figure this higher backlog will help propel the company's shipments and sales higher next year.

We currently have a stock price estimate of $26.67 for GE , marginally below its current market price.

See our complete analysis of GE here

Results At GE's Industrial Segment Will Grow In 2014

Results at most of GE's industrial segments will likely grow in 2014. At Oil & Gas segment, where GE is a major provider of oil/gas drilling machinery and equipment, the company will benefit from the ongoing strong growth in the sector driven by rising demand for oil & gas from the emerging countries. These fast-growing emerging countries will also continue to lift results at GE's Healthcare segment where it provides CT/PET scanners, X-ray machines and other diagnostics. At GE's aviation segment, higher production rates at aircraft manufacturers like Boeing ( BA ) and Airbus driven by their growing order backlogs will increase shipment volumes of aircraft engines and parts. However, this growth at GE aviation from commercial aviation will likely be offset in part by reduced military aviation spending. At appliances and lighting segment, rising global adoption of energy-efficient lights like LED will continue to boost sales of GE's LED lighting products. At the same time, continued recovery in U.S. housing starts will also support sales growth in GE's appliance and lighting products in 2014.

On the flip side, GE anticipates sales and profits at its Transportation segment, which manufactures locomotives, to fall in 2014 due to weakness in the global mining industry and the North American coal sector. All in all, in 2014, the company anticipates its industrial organic sales to rise by 4-7% annually and its profits to rise at a higher rate on additional gains from cost cutting.

Apart from these segment-specific trends, certain other major trends like growing adoption of analytics in boosting efficiency of machines and equipment will also grow GE's results in 2014. On its part, the industrial conglomerate is investing heavily in the development of its industrial Internet ecosystem which seeks to harness this emerging trend. Read here in greater detail about the strong return potential on GE's industrial Internet investments.

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