GE Earnings Beat, Hopes For 2nd Half Send Stock Soaring

Investor's Business Daily

General Electric's (GE) second-quarter results were mixed, but shares soared Friday on the industrial conglomerate's record backlog and hopes that it can translate that to improved margins this year.

Q2 earnings fell 5% to 36 cents per share, but beat analyst estimates by a penny. Revenue slid 4% to $35.12 billion, falling short of estimates for $35.6 billion.

"Emerging markets remain resilient, and in the U.S. we saw strong growth in orders this quarter," GE CEO Jeff Immelt said in a statement. "Europe is stabilizing but still challenged.

'Expectations Are High'

GE's backlog of equipment and services at the end of Q2 rose $7 billion from Q1 to $223 billion, its highest ever. A large backlog is important because it indicates stronger future revenue.

But orders aren't sales, and GE still has to deliver the products. It's been making lofty promises for a better second half of 2013.

"GE is going to have to deliver to impress investors because expectations are high," Christian Mayes, an industrials analyst at Edward Jones, said.

The company renewed its vow to improve margin growth by 70 basis points this year. Industrial segment margins rose 50 basis points in the quarter.

GE rose nearly 5% in the stock market Friday to 24.72, hitting its best levels since October 2008.

In Q2, GE saw profit growth in six of seven industrial businesses. In Q1, industrial revenue fell 6% on lower sales of generators used in electrical power plants and wind turbines. Industrial demand was expected to be slow in the first half of the year.

Earlier, GE said 70% of its big-ticket turbine sales would be in the back half of 2013. GE and its aircraft engine joint ventures announced orders for $26 billion at the Paris Air show in June.

Another industrial giant, Honeywell (HON), reported a 1% drop in sales for its aerospace division on planned ramp-downs and program delays.

But overall Q2 sales rose 3.2% to $9.7 billion, in line with analysts' expectations. Honeywell's earnings rose 12% to $1.28 per share, beating views by 7 cents.

"It's still a tough environment, but industrials companies are learning to squeeze more profits from slower sales growth," Mayes said.

Honeywell shares edged up less than 1% Friday, hitting a record high intraday.

Shares rose for a fifth straight week even though U.K. officials said a Honeywell emergency beacon was the likely cause of a recent fire on an Ethiopian Airlines Boeing (BA) 787 Dreamliner in London. Airlines are split on whether to remove the beacon.

The transportation systems segment was a bright spot for the company as revenue jumped 5%, the first growth since 2011, on improved turbo gas sales.

Honeywell narrowed its full-year per-share earnings target to $4.85-$4.95 from $4.80-$4.95. Analysts expected $4.95.

Addition By Subtraction

Meantime, GE is looking to expand earnings by contracting the scope of the company during the next year.

GE Capital earnings fell 9%, in line with planned asset reductions. In May, GE said it would receive $6.5 billion in dividends from GE Capital as part of the overall mission to reduce the size of its financial arm. GE also sold its stake in NBC Universal to Comcast (CMCSA).

But Honeywell is hungry for acquisitions, Mayes said. He thinks it could find some aerospace firms that could add to growth.

GE and Honeywell are in the Diversified Operations group, ranked No. 120 out of the 197 industries that IBD tracks.

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