General Electric (GE) Q4 Earnings Preview: Lower Costs Boost Industrial Profit Margins

  @natrudy on January 16 2014 5:32 AM
  • GE_Jeff Immelt
    General Electric (GE) Chairman and CEO Jeff Immelt delivers the opening remarks before a panel discussion hosted by GE on "The Future of Manufacturing: Growing American Competitiveness" at the Mellon Auditorium in Washington on Feb. 13, 2012. Reuters/Gary Cameron
  • GE Immelt Jef March 2013
    GE CEO Jeff Immelt Reuters
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Earnings Preview: Will General Electric Company (GE) Top Estimates? GE chief Jeff Immelt  Reuters

General Electric Company (NYSE:GE), one of the world's largest industrial conglomerates, could see its fourth-quarter profits jump 17 percent as its industrial sales fared well in an economically resurgent quarter.

The Fairfield, Conn.-based conglomerate reports quarterly and full-year results Friday before markets open. Analysts polled by Thomson Reuters expect, on average, profits of $5.38 billion, up from $4.6 billion a year ago. Revenue is expected to come in at $40.2 billion, up 2.3 percent, with earnings per share of 53 cents, up 21 percent from the previous year's fourth quarter.  

“We expect growth in 4Q to be solid with 4-5 percent core growth in industrial segments and 100bps [basis points] of industrial margin expansion,” wrote Barclays analysts, highlighting stronger organic sales and broader profit margins for GE.

Recent improvement in the U.S. economy and global infrastructure markets, especially in emerging markets aside from China, have helped GE's sales. GE sells a wide variety of industrial infrastructure and equipment to governments and businesses.

The company’s power and water, oil and gas, and home and business solutions units performed well in the fourth quarter, though its key aviation business has shown weakness, according to Barclays analysts.

In key fourth-quarter guidance for analysts and investors, General Electric announced in a late December investor day that it expects 70 percent of earnings to come from industrial operations by 2015, significantly slimming its reliance on financial services revenue, which it takes from its profitable GE Capital business. It projected 4 percent to 7 percent industrial sales growth in 2014 in December, with $90 billion in imminent dividends, buybacks and acquisitions, alongside organic growth.

The company has already embarked on a broad cost-cutting initiative, with the goal of reducing general and administrative costs to 12 percent of overall costs, from 16 percent currently.

“The company’s recent simplification efforts have helped lower selling, general and administrative expense, which have benefited profitability,” wrote Morningstar Inc. (NASDAQ:MORN) analyst Daniel Holland in late December.

“Seeing the larger orders they reported in the third quarter, and how those materialized in the fourth quarter” is the biggest near-term driver of fourth-quarter earnings, Holland told IBTimes.  

“They posted some pretty solid order growth in the third quarter across their segments,” said Holland, who doesn’t see clear winners or losers among GE’s diverse business units, which operate in health care, transportation, energy, finance and mining sectors. Some analysts, like William Blair & Co.'s Nick Heymann, have been bullish on its oil and gas unit. 

GE could be impacted by one-time items related to the IPO of its Swiss consumer finance unit GE Money Bank in the fourth quarter, said Heymann. Barclays forecasts $29.6 billion in industrial sales in the upcoming quarter, up slightly from $28.2 billion a year ago, and accounting for almost three-quarters of the period's estimated $40.2 billion in revenue.

Wind turbine and large gas turbine shipments should be up significantly over the fourth quarter, accounting for a large September 2013 order from Algeria. Strong interest in gas turbine tech upgrades from GE clients should impact earnings too, according to Barclays.

“It sounds like the fourth quarter was very good operationally,” though the company has much restructuring to do in 2014, Heymann told IBTimes in late December.

William Blair projects industrial sales to increase 8 percent to 10 percent on a yearly basis, up from the investment bank's earlier 6 percent forecast, for the quarter. Industrial profit margins should expand, too, on William Blair estimates.

Future strength could come from GE’s renewed emphasis on big data and the industrial Internet, where the company could gain from further multiyear service contracts, Holland said. GE makes a good deal of money after initial orders by maintaining service contracts for its equipment.

GE secured its largest-ever jet engine order from The Emirates Group airline in late November at the Dubai Air Show, but the $11 billion order merely extends the company’s record $229 billion backlog for the time being, with delivery several years down the line.  

General Electric also made a handful of small acquisitions and facility openings over the fourth quarter, which signaled future intentions but are unlikely to impact upcoming earnings. GE expanded its reach into life sciences with a $1 billion acquisition of gene and cell businesses from Thermo Fisher Scientific Inc. (NYSE:TMO), the company said in early January -- and it boosted its oil and gas equipment unit with U.S. acquisitions and a renewed push in Brazil, working with its client and partner NOC Petrobras, a Brazilian oil giant.

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