General Electric ( GE ) is likely to achieve its target of double-digit earnings growth in 2012, and in a recent investor meeting, the company announced that it is maintaining the same target for its industrial businesses in 2013. But GE faces severe headwinds due to a weak global economy in achieving this target. So what are the strategies that it will adopt to achieve double-digit earnings growth in 2013?
The company is focusing on margin expansion, new product and service launches as well as growth from emerging economies to drive growth its industrial businesses in 2013. Additionally, the natural gas revolution, increased global investment in infrastructure, and low interest rates in developed countries will provide further momentum to its earnings growth in 2013. But a tough economic environment in Japan, continuing slowdown in Europe and budget cuts in the U.S. may offset its plans.
Separately, GE has been consistently increasing the share of its industrial businesses at the expense of its financial businesses in its overall earnings mix. We currently have a stock price estimate of $21.78 for the company , nearly in line with its current market price.
GE is depending on its ability to price many of its innovative products at a premium in several markets to support margin expansion. The company's operating margin was 14.8% in 2011, and it is projected to rise by 30 basis points in 2012. GE anticipates a further 70 basis points improvement in 2013. Additionally, GE aims to generate savings on product costs by utilizing its global sourcing network with a particular emphasis on localization and lower cost structures in China and India. This margin expansion will aid earnings growth in 2013.
Growth From Emerging Economies
The fast-growing economies of Asia-Pacific and Latin America as well as the increasing industrialization of resource rich Middle-East, North Africa and Russia will help drive growth. GE offers products and services ranging from oil and gas drilling equipment, power generation turbines and mining solutions to locomotives, aviation engines and healthcare equipment. As these emerging economies grow, GE will benefit from demand for its various businesses in regions around the world.
Energy, Healthcare And Aviation To Drive Growth
Specifically, we expect high growth in the oil & gas, aviation and healthcare segments to help deliver growth to GE's business corresponding business units.
The oil & gas segment will grow the quickest due to rising investment in the sector due to high crude oil prices. GE's offerings include drilling and production systems as well as analytics capabilities that drive productivity at such operations. Revenues from GE's oil & gas segment have increased from $5.1 billion in 2005 to an estimated $15 billion in 2012, and GE's increasing share in subsea systems will likely continue to raise this figure further.
The aviation segment is also benefiting from steady growth in passenger traffic and the improving profitability of airlines. However, uncertainty over military aviation spending continues. Overall, GE Aviation is well positioned in several engine lines like CFM's LEAP to take advantage of the growing commercial aviation industry.
In the healthcare segment, developing countries are driving demand for healthcare equipment like CT and PET scans manufactured by GE. However, uncertainty in the healthcare sector of Europe remains a potential drag on growth.
As a result of the growth in these segments along with GE's increasing focus on its industrial businesses, GE's industrial businesses' overall earnings mix have risen in the past few years from around 50% in the early 2000s to 55% currently. GE targets this mix to reach 70% over the long-term, with a 65% industrial earnings mix by 2015.
New Product And Service Launches
GE also plans to launch several new products and services in key markets to drive its earnings in 2013. New products run the gamut including items such as silent MR scanners, GE9x engines for wide-body aircraft like Boeing 777 that promise significant fuel savings, subsea trees and battery-powered shield haulers for mining operations. New service offerings include FlexEfficiency which optimizes asset utilization to increase energy output in drilling operations. While these are a sampling of GE's plans, the industrial giant relies heavily in new technology and innovation, and this is a key driver to growth looking ahead.