General Electric’s (GE) quarterly earnings bolster the bullish view that GE’s decision to ditch its finance business is ultimately going to be a very good thing for GE stock.
After all, GE’s industrial segment put up some very encouraging numbers in the second quarter, despite a sluggish global economy and the great pullback in energy prices.
The strategy of making companies leaner and more profitable is very much in vogue these days. In GE’s case, the idea is particularly attractive. The financial industry is nothing like it was before the crisis now that firms have to contend with reams of new rules and regulations.
Meanwhile, as anyone who’s been paying attention to financial sector earnings knows, revenue growth is hard to find, hurt by near-zero interest rates and other factors. Just look at mighty Wells Fargo’s (WFC) Q2 report.
But by far the best reason for GE to go back to its industrial roots was its designation as a systemically important financial institution. No company wants the federal government to give it special attention and hold it to higher standards. The company’s GE Capital segment — once an engine of growth — had become a liability.
The downside is that GE has to drive higher revenue and margins without contributions from its former bell cow.
Industrial Strength GE Earnings
That’s why the General Electric earnings report should help the bull case on GE stock. As CEO Jeff Immelt noted in a statement, the global economy is one of slow growth and volatility — especially in once-hot emerging markets — and the U.S. is improving only gradually.
And yet, in that environment, GE’s industrial segment enjoyed a 5% increase in organic revenue — or revenue excluding the effects of acquisitions, dispositions and currency exchange. That’s not bad for a company that did nearly $30 billion in sales in three months.
Other numbers were likewise heartening. Orders in the industrial division rose 8% — or 11% on an organic basis — and operating margin expanded significantly. It all added up to a 5% increase in operating profit (11% on an organic basis.)
The bottom line is that GE earnings topped the Wall Street estimate for both profit and revenue. Even better from the perspective of GE stock’s shorter-term performance, the company lifted its earnings outlook.
For the most recent quarter, earnings came to 31 cents per share, or a 19% climb in EPS. Analysts, on average, forecast earnings of 28 cents, according to a survey by Thomson Reuters. Industrial revenue came in at $26.9 billion, and overall revenue of $32.8 billion beat Street estimates by four billion dollars.
The better-than-expected results led GE to raise the bottom of its estimated range for industrial operating earnings by 3 cents per share.
True, the market likes few things better than a beat-and-raise quarter during earnings season, but GE stock rose no more than 1% by Friday afternoon.
Fair enough. GE stock has been range-bound for two years. It’s in the midst of an enormously disruptive and expensive transformation. And the macroeconomic situation — from slow growth to lower oil prices — isn’t doing it any favors. There’s nothing wrong with being cautious.
Nevertheless, GE stock is more attractive in light of second-quarter results. Given the progress GE is making, it’s hard to believe its stock price won’t be much higher three or five years from now than it is today.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
