General Electric Co reported earnings that met Wall Street expectations, but its shares slipped 1.4 percent as investors worried about declining profit margins at its energy equipment division.
The decline -- to a rate of 13.7 percent from 16.5 percent a year earlier -- reflected weak demand for electric turbines holding down selling prices at the largest U.S. conglomerate's biggest industrial unit.
Margins missed our forecast and were down year on year in the four big industrial businesses, said Jeffrey Sprague, managing partner at Vertical Research Partners. There is little or no operating leverage in GE's portfolio due to low-priced equipment in backlog and R&D headwinds.
A lower-than-expected tax rate offset the weak margins, allowing the company to notch 18 percent profit growth.
GE, which also makes jet engines and railroad locomotives, said on Friday the third quarter marked a turning point for margins, which it said would improve in the fourth quarter.
In 2012, we should have solid organic growth and expanding margins, Chief Executive Jeff Immelt told investors on a conference call. We're lined up to have solid growth in aviation and energy.
The Fairfield, Connecticut-based company expects to increase profit by a double-digit percentage rate next year, despite worries that Europe's brewing debt crisis could hit global demand. GE noted that it generates just 18 percent of its industrial revenue on the continent.
That made it the second big U.S. manufacturer to weigh in on 2012 this week. United Technologies Corp on Wednesday said it looked for 2012 profit to grow about 10 percent, excluding the effects of the $16.5 billion acquisition of Goodrich Corp.
GE shares were down 2.3 percent at $16.24 on Friday afternoon on the New York Stock Exchange. The decline came on a day when the Standard & Poor's 500 index was up 1.2 percent.
EMERGING MARKETS STRONG
Sales outside the United States were up 25 percent in the quarter, with strength in Brazil, Russia and China helping to offset slack demand in GE's home country and Europe.
Overall orders for industrial equipment -- an important indicator of future sales -- rose 16 percent. International highlights included China, where orders were up 65 percent; India, up 25 percent; Latin America, up 15 percent and Russia, which more than doubled, but off a relatively smaller base, Chief Financial Officer Keith Sherin said in an interview.
Big third-quarter orders included an $800 million deal to supply gas and wind turbines to Brazil and $300 million worth of turbines to Egypt. GE also reached two new Russian joint ventures to make energy and healthcare equipment.
GE spent $11 billion through late 2010 and early 2011 to build up its presence in the energy sector as it sold its majority stake in the NBC Universal media business.
The organic growth rate in industrial was strong, said Jack De Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire. Those are telling and they give us a little bit of a look into next quarter and beyond.
The report comes amid a wave of generally strong earnings reports from big U.S. manufacturers. Also on Friday, Honeywell International Inc reported a 45 percent profit rise that topped expectations. Fellow blue chips Caterpillar Inc and 3M Co will report next week.
Still, investors remain concerned whether Europe's crisis could drag down global demand by shaking the financial system.
Possible concerns going forward are going to be related to Europe and what impact that may have, not just there but on global growth in general, said Perry Adams, vice president and senior portfolio manager at Huntington Private Financial Group in Traverse City, Michigan. There's elevated uncertainty.
GE has been preparing for an uncertain economy.
I don't think the environment has really surprised us, Immelt said. We've positioned our company to win in '12.
BUYS BACK BUFFETT STAKE
GE reported third-quarter earnings attributable to common shareholders of $2.34 billion, or 22 cents per share, compared with $1.98 billion, or 18 cents per share, a year earlier.
Revenue was little changed at $35.37 billion, above the $34.94 analysts had forecast.
Factoring out one-time items, profit came to 31 cents per share, meeting analysts' average forecast, according to Thomson Reuters I/B/E/S.
The results included an 8-cent-per-share charge to buy back the preferred shares the company had sold to Warren Buffett's Berkshire Hathaway Inc during the financial crisis.
Buying back the Buffett stake, which carried a preferred dividend, will boost GE's annual earnings by 3 cents per share in the coming years.
Closing that deal also allows GE to focus its capital on buying back shares -- Immelt wants to reduce the shares outstanding to their level prior to October 2008, when the company sold $12 billion of common shares in addition to Buffett's stake -- raising its dividend and doing small acquisitions.
The company bought back $1 billion in shares through the third quarter, Sherin said.
We had a market that we thought was good prices to buy the stock back at and we ramped it up a bit, Sherin said. We're going to balance it with what we do with the dividend as a priority and what we do with M&A.
(Reporting by Scott Malone in Boston, additional reporting by Nick Zieminski, Edward Krudy and Ryan Vlastelica in New York, editing by Derek Caney, Dave Zimmerman and Matthew Lewis)