Diversified conglomerate General Electric Company (GE) reported strong second-quarter 2014 results with healthy year-over-year increase in revenue and earnings backed by solid industrial segment profit growth and margin expansion.
Operating earnings for the reported quarter improved to $3.9 billion or 39 cents a share from $3.7 billion or 36 cents a share in the year-ago quarter. The increase in year-over-year earnings was primarily attributable to top-line growth. Operating earnings for the reported quarter were in line with the Zacks Consensus Estimate.
On a GAAP basis, the company reported quarterly earnings (from continuing operations) of $3.6 billion or 35 cents per share compared with $3.3 billion or 31 cents in second-quarter 2013.
Total revenue for the reported quarter increased 3% year over year to $36.2 billion and marginally fell short of the Zacks Consensus Estimate of $36.3 billion. While overall Industrial segment revenue increased 7% to $26.9 billion, GE Capital revenue dropped 6% year over year to $10.2 billion. The decrease in GE Capital’s revenue was in accordance with the corporate strategy to lower top-line growth from the financial unit.
The company received strong orders during the quarter across the globe. Orders from growth markets were up 6% as six out of nine regions witnessed revenue rise. Services revenues were up 5% during the quarter. Total backlog of equipment and services at quarter-end reached $246 billion with year-over-year improvement in each segment.
During the reported quarter, General Electric successfully bid for the Power and Grid business of French conglomerate Alstom. The offer, accepted by both the French government and the Alstom management, is currently awaiting mandatory regulatory and shareholder approvals. The deal, expected to close in 2015, is likely to be accretive to General Electric's 2016 earnings by 6-9 cents per share. Consequently, General Electric is expected to achieve its target of 75% of total earnings from its Industrial business by 2016.
Subsequent to the quarter end, GE Aviation Systems and CFM International procured aircraft engine deals worth over $36 billion at list price, including $13 billion with Emirates, $3.3 billion with easyJet and $2.6 billion with American Airlines. CFM International is a 50-50 joint venture between Snecma S.A., a French multinational aircraft manufacturer and subsidiary of Safran SA (SAFRY), and GE Aviation.
Revenue by Segment
During the reported quarter, Oil & Gas revenues improved 20% year over year to $4.8 billion, while Energy Management revenues decreased 6% to $1.8 billion. Revenues from Aviation and Power & Water segments climbed 15% and 10% year over year to $6.1 billion and $6.3 billion, respectively.
Both Healthcare and Appliances & Lighting segment revenues remained flat at $4.5 billion and $2.1 billion, respectively. Revenues from the Transportation segment decreased 18% year over year to $1.3 billion.
Revenues from the GE Capital segment declined 6% year over year to $10.2 billion as the company continued its strategy to reduce the overall size of its portfolio while focusing on core growth. GE Capital paid $1.4 billion as first-half 2014 dividend to parent General Electric. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital was $371 billion at quarter-end. GE Capital finished the quarter with a Tier 1 common ratio of 11.7% with net interest margin at 5.0%.
General Electric is targeting the initial public offering (IPO) of its North American consumer lending unit in end July as the first concrete step to shrink its finance business by 2015. The strategic move is arguably the biggest step in restructuring GE Capital’s portfolio to shield the parent company from intense market volatilities that plagued the market during the 2008-09 financial crisis. The spin-off will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as medical equipment and scanners.
Margins, Balance Sheet and Cash Flow
With the spin-off, General Electric expects operating earnings from its industrial business to aggregate 75% of the total operating earnings of the company by 2016. The company is currently on track to achieve its goal of $1 billion cost-cuts in the year. During the first half of the year, General Electric was able to reduce industrial structural costs by $382 million versus the prior-year period, driven by simplification initiatives and benefits from restructuring investments.
Operating profit in the Industrial segment increased 9% to $4.2 billion with cost productivity while GE Capital profit declined 5% year over year to $1.7 billion. General Electric’s total segment profit for the reported quarter increased 4% year over year to $5.9 billion, with a rise in profits from Oil & Gas (up 25%), Appliances & Lighting (up 23%), Aviation (up 12%), and Power & Water (up 4%), partially offset by a considerable decline in profit in the Transportation segment (down 14%).
Cash generated from operating activities year to date was $3.4 billion. Cash and marketable securities at quarter end aggregated $132.7 billion. General Electric returned $5.9 billion to investors during the first half of the year through $4.4 billion dividend payouts and $1.5 billion share buybacks. General Electric ended the quarter with $87 billion of consolidated cash and cash equivalents.
With a focused and dedicated execution of its strategic plans as reflected in solid second-quarter results, General Electric expects to continue its bull run in 2014 with an unchanged framework and simultaneously benefit the shareholders with a healthy return on investments. The company has exited from the media business and has increased its investments in core industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. General Electric also remains focused on its stringent cost-cutting measures. We remain encouraged with these endeavors of the company.
Driven by relatively strong quarterly results that exceeded expectations, market sentiments appear to be positive. Share prices were on its way up in pre-market trading as investors reacted positively on a strong outlook and focused approach to realign the corporate structure to a manufacturing-based entity.
General Electric presently retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Macquarie Infrastructure Company LLC (MIC) and CLARCOR Inc. (CLC), each of which carry a Zacks Rank #2 (Buy).