Credit: Shutterstock photoDiversified industrial conglomerate, General Electric Company ( GE ) managed to surpass expectations for both earnings and revenues in the third quarter of the year despite the weak global macroeconomic environment. The credit goes largely to the company's sustained restructuring initiatives and its focus on industrials businesses. Shares of the company rose about 3.4% following the earnings release last Friday.
Operating earnings increased from the prior-year level, thanks to stringent cost-cutting and simplification initiatives that drove healthy margin improvement. However, revenues decreased slightly on a year-over-year basis due to lower Industrial segment and GE Capital revenues.
Q3 Earnings in Detail
General Electric Company's operating earnings for the quarter were $3.3 billion or 32 cents a share compared with $3.2 billion or 31 cents a share in the year-ago quarter. Operating earnings exceeded the Zacks Consensus Estimate by 6 cents. Including industrial and other verticals, operating earnings improved 16% year over year to 29 cents per share.
Total revenue fell slightly to $31,680 million from $32,107 million in the year-earlier quarter, but topped the Zacks Consensus Estimate of $28,666 million. Both the Industrial segment and GE Capital revenue declined 1% year over year. However, organic revenue growth for the Industrial segment improved 4% for the quarter, with improvements in 6 out of 7 segments (read: Weak Industrial Earnings Drag Industrial ETFs Lower ).
Restructuring Actions
General Electric has vouched to divest most of the financial units under GE Capital over the next 24 months in an attempt to focus more on its core industrial businesses. Year to date, the company has signed agreements to dispose GE Capital assets worth $126 billion - well ahead of its divestiture target of $100 billion for the year. The conglomerate expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014 (read: Industrial ETFs in Focus on GE Restructuring Plans ).
Outlook
General Electric continues to expect double-digit operating EPS growth in Industrial and expects the Industrial operating EPS to be within $1.13-$1.20 per share for 2015. At the same time, the company remains committed to achieve 2-5% Industrial segment organic revenue growth; margin expansion; a smaller GE Capital; $16 billion in cash flow from industrial activities; and $30 billion cash return to shareowners for the year (read: 3 ETFs to Watch on Weak Industrial Data ).
ETFs to Play
Investors should keep an eye on General Electric's share price movement in the next few trading sessions following the earnings beat as the company continues with its strategic restructuring initiatives. As such, ETFs that are heavily invested in this diversified conglomerate could be impacted by the company's performance in the coming days. Below we highlight three of these ETFs (see all Industrial ETFs here).
Fidelity MSCI Industrials ETF ( FIDU )
This fund tracks the MSCI USA IMI Industrials Index, holding 344 stocks in its basket. General Electric takes the top spot at 13.08% share with the aerospace and defense industry making up for 23.75% of the portfolio, followed by industrial conglomerates at 20.83%. The product has amassed $74 million in its asset base while it trades in good volume of more than 72,000 shares a day. FIDU is one of the low-cost choices in the space charging 12 bps in annual fees from investors. However, the fund is down 6.2% so far this year (as of October 16, 2015). It has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.
Vanguard Industrials ETF ( VIS )
This fund follows the MSCI US IMI Industrials 25/50 index and holds about 345 securities in its basket. Of these firms, GE occupies the top position with 11.5% share. Here again, aerospace and defense takes the top spot at 23.2% followed by industrial conglomerates at 18.9%. The fund manages $1.9 billion in its asset base and charges only 12 bps in annual fees. Volume is moderate as it exchanges 105,000 shares a day on average. The product lost 6.1% in the year-to-date timeframe and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Industrial Select Sector SPDR Fund ( XLI )
This product provides exposure to 66 industrial stocks by tracking the Industrial Select Sector Index. It is heavily concentrated in GE - the top firm - with 11.63% of assets. Like the above two ETFs, XLI gives the highest exposure to aerospace and defense with 27% allocation followed by industrial conglomerates at 21%.
The fund has garnered $7.4 billion in assets and trades in a heavy volume of 10.8 million shares per day. It has a low expense ratio of 0.15%. The product shed 7.1% in the year-to-date period and has a Zacks ETF Rank #3 with a Medium risk outlook.
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GENL ELECTRIC (GE): Free Stock Analysis Report
FID-INDUSTL (FIDU): ETF Research Reports
VIPERS-INDUS (VIS): ETF Research Reports
SPDR-INDU SELS (XLI): ETF Research Reports
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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 Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
