General Electric (GE, Financial) as of late been in the news due to its exposure to oil. The company’s share prices have dropped nearly 2% so far this year as investors are worried about its outlook. The company’s latest fourth quarter earnings report was released on January 23. It was a strong show of GE’s strength in different operating segments, which alleviated investors’ concerns to some extent. This was visible in the share price that went up after the earnings report.
The industrial conglomerate has strong fundamentals and seems to be heading the right ways. Let’s take a quick look at the latest financials of the company and understand its growth story in the near and long term.
Capturing the essence of the latest financials
Post its earnings release on Friday, the company’s stock soar 20 cents to $24.48, highlight the positive market sentiment. The company recorded net earnings increase of a staggering 61% to $5.5 billion relative to last year, which translates to $0.51 a share. Revenue during the quarter came in at $42 billion, up from $40.3 billion registered a year ago. The growth in revenue is majorly driven by the industrial segment of the company that recorded a revenue of $31.8 billion, a rise of 6% from last year same period.
There are seven operating segment in GE industrials. Power & Water makes the highest contribution in revenue and profit. This time too, the segment gave a spectacular show with revenue increasing 22% to $9.4 billion and segment profit rising 13% to $2.1 billion compared with last year same period. The second key industrial segment that drove growth was Aviation. Revenue of this division increased 4% to $6.4 billion and segment profit went up 12% to $1.4 billion. Besides this, transportation and appliance segment saw positive results.
In contrast, the Oil & Gas segment saw its quarterly revenue drop by 6% to $5 billion, but profit improved 1% over prior year period. GE has made big investments in this segment as it sees immense growth opportunity here. However, with crude oil plummeting to nearly half of what it was months ago, segment orders have fallen 10%. Orders for drilling equipment were worst hit as it dropped 72%. Through the year, the company was not required to negotiate lower price for its order backlog. But now, customers have started contacting to defer projects as they seek to cut costs. Plunging oil prices are expected to continue to be a drag on current year results, GE expects.
Segment Performance Break up, Snapshot taken from GE earnings presentation
For the entire year, GE reported $148.6 billion in revenue, an improvement of 2% over prior year. Net earnings for the fiscal year increased 17% to 15.2 billion, which comes to $1.5 a share. For 2015, GE is keeping an overall optimistic industrial outlook, but that’s not without a pinch of salt. It forecasts industrial segment to see overall revenue gain of 10%, while Oil & Gas to stay flat to down 5%.
A good year overall, some key takeaways
In the words of company CEO Jeff Immelt: “GE ended the year with strong fourth-quarter industrial earnings and margin growth. The environment remains volatile, but we continue to see infrastructure growth opportunities. We are pleased with our execution in 2014”. Times were tough in the second half of the year, but GE sailed through. There are quite a few positive takeaways. For one, the company managed to keep a tight check on its SG&A expenses, which reduced as a percentage of sales. In 2012, SG&A made for 17.5% of sales. It has reduced to 14% of sales in 2014 and is forecast to go down further to approximately 12% in 2016. This is supporting the company to expand its margins.
Meanwhile, the company’s also working on its biggest priority, i.e., earning more than 75% of its earnings from industrial and reducing the share of GE Capital by 2016. Spinning off Synchrony Financial is one of the biggest steps taken by the company in this direction. Finally, the $17 billion Alstom (ALSMY, Financial) acquisition which is slated to complete mid this year is the most awaited event of the current fiscal year. There are immense synergies expected to come GE’s way through the takeover of Alstom’s power business.
So there’s lot of things GE investors should be looking to see this year. There are more of reasons to stay positive about the stock than to be cynical in the long term. The company has ended 2014 on a decent note, and it’s time to watch out for its current year performance.
