GE Is Back to Firing on (Most) Cylinders

by Dan Burrows | July 20, 2012 12:07 pm

After being hamstrung by the financial crisis and Great Recession, General Electric (NYSE:GE[1]), the bellwether sprawling conglomerate, looks to be back to its winning ways.

The Dow component has been in a tizzy of activity over the last few years getting its various businesses in order — especially the financial arm of GE Capital — and its latest quarterly results show the moves are paying off.

GE beat Wall Street’s second-quarter earnings estimate by a penny a share, and it maintained its outlook for the full fiscal year — and that’s despite the hit its European operations are suffering amid the continent’s economic woes.

Yes, profit slipped 16%, but that was widely expected and not as bad as analysts feared. Revenue ticked up 2%, just shy of Street forecasts.

But most heartening are the company’s core businesses, both of which posted strong profit gains. Finance and energy account for nearly 70% of GE’s revenue, so it’s critical that the conglomerate gets power from those twin engines.

Energy infrastructure, which makes everything from natural gas turbines to solar panels, posted a 13% gain in segment profits.

More impressive were the figures out of the finance unit, GE Capital, where robust results in real estate financing led to a 31% jump in profit.

As has been evident in results from banks[2] like Wells Fargo (NYSE:WFC[3]) this earnings season, record-low interest rates are prompting a surge of new mortgages and home refinancing activity[4].

It’s the latest bit of good new for GE’s finance arm, which did so much to hobble the company during the financial crisis. GE passed a major milestone back in May when it said GE Capital would start paying a dividend[5] to its corporate parent for the first time since 2009.

GE Capital offers loans, leases and financing, and was a hot profit-maker back in the day. But it quickly turned into a drag when the economy slowed and the financial system nearly collapsed.

And now it’s back to boosting results and the company’s coffers. GE Capital paid a total of $3 billion in dividends to GE during the second quarter. That’s key, because capital-intensive companies like GE can never have enough cash. The company doesn’t just need cash for its generous 3.4% dividend and $12 billion share-repurchase program — it has been doing big deals, too.

True, GE did hit headwinds during the quarter. A stronger dollar reduced revenue by $900 million. With the euro in crisis, that drag may persist. Additionally, infrastructure orders declined year-over-year, hurt by a sharp drop in demand for wind turbines. And margins contracted in the industrials segment.

What’s heartening, however, is that GE was still able to target double-digit-percent earnings growth for the full year. That’s a big boost of confidence given the company’s sensitivity to the slowdown in Europe.

Perhaps best of all, shares in GE are up nearly 12% in 2012, beating the broader market by about 3 percentage points, but they still look to offer compelling value. The stock trades at an 18% discount to its own five-year average on a forward earnings basis. It also trades at just a slight premium to the broader market, despite having stronger growth prospects.

As we said back in May, GE looks like a good long-term bet[6]. It’s a pro-cyclical play that’s more than holding its own through a tough macroeconomic environment, and the fundamentals are the best they have been in years.

As of this writing, Dan Burrows held none of the securities mentioned here.

  1. GE:
  2. results from banks:
  3. WFC:
  4. new mortgages and home refinancing activity:
  5. GE Capital would start paying a dividend:
  6. GE looks like a good long-term bet:

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