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Dow 30 Earnings: General Electric – Fourth Quarter 2011
Dow-30 component General Electric (GE – Free General Electric Stock Report), the world's largest industrial conglomerate, saw its shares dip a bit in early morning trading after it posted fourth-quarter figures that were a touch below what both Value Line and Wall Street were anticipating. Earnings of $0.39 a share were just a penny below the consensus estimate, but the top-line showing drew more critical reviews.
Revenues came in at $37.97 billion, more than 8% below the year-earlier tally. The sale of GE’s stake in the NBC network played a role in this decline, but other segments struggled, as well. European operations, in particular, were off, as spending in that region has been suppressed by ongoing sovereign-debt concerns across the Continent. CEO Jeffrey Immelt announced, within the quarterly earnings release, that European operations will need to be restructured as a result of these woes. Too, GE Capital, the company's finance arm and its second-largest division, is going through an overhaul to improve efficiency. The top line there fell 9% against the same period in 2010. Further showings of this nature can be expected in the near term, as the company makes efforts to pare its reliance on the financial aspect of this branch, and rely more on its diverse portfolio of industrial businesses that produce everything from jet engines to light bulbs.
GE capital grew well beyond its traditional purpose of financing the company's industrial equipment sales and into home mortgages and consumer finance during the boom period that ended with the most recent recession. Since then, bad loans are being shed and the newer businesses that the division got into are being sold off. In fact, the whittled down branch now produces less revenue, but its recovery has been the main driver of profit gains in the last few years.
Still, not all the news was downbeat on the revenue front. Infrastructure orders rose 15% in the quarter, leaving GE with a $200 billion backlog, the biggest in the company's long and storied history. Jet engines and gas turbines were in high demand in the Middle East, and all indications are that GE is making the slow-but-steady climb back to dominance. Much will depend on the global economy in the years ahead, and its recent shakiness undoubtedly adds a level of uncertainty to this blue chip's prospects.
In that vein, management has intimated that 2012 could well be a year marked by substantial volatility in many of its end markets. For that reason, heavy funding has been used on new products and technologies, especially those prevalent in emerging markets where growth characteristics are strong. We continue to believe that GE can earn $1.60 a share in 2012, which would represent a handsome bounce (just shy of 20%) from the just disclosed 2011 tally.
In order to reach this number, the majority of our assertions about GE's various operations must pan out. For starters, the energy infrastructure space needs to continue its resurgence. Moreover, positive developments on the aviation and healthcare side of the coin must be capitalized upon. These, coupled with the ongoing retooling of GE Finance, should create a strong backdrop with which to power bottom-line success.
From an investment perspective, we still like these shares for their long-term appreciation potential. The fact they are trading well below their historical range backs up this statement. Income-minded investors also have an enticing entry point at this time, in our view. And it’s worth noting that we expect the dividend payout to rise sharply in the coming years, as GE's numerous business units return to prominence under clearer economic skies.
About The Company: Founded in 1892, General Electric Company has grown into one of the largest and most diversified industrial companies in the world. Its variety of segments include Energy Infrastructure (28% of ’10 revenues); Technology Infrastructure (29%); Home & Business Solutions (7%); and Capital Finance (36%). On a geographic scale, more than half of General Electric’s revenues came from overseas in 2010.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.