Practically everything that could go right did go right this quarter for General Electric (NYSE:GE).

The conglomerate today reported better-than-expected results,  as CEO Jeffrey Immelt’s strategy of shrinking its finance unit, slashing costs and investing in its industrial business is paying off.  Six out of the Fairfield, Conn. company’s seven businesses posted gains in profit. The company’s backlog was at a record $229 billion, an increase of $6 billion from the second quarter. Orders rose 19% to $25.7 billion while industrial margins grew 120 basis points in the quarter and are expected to expand 70 basis points for the year.

“It was encouraging to see the strength in their orders,” William Blair & Co. analyst Nick Heymann told Bloomberg News. “The performance on margins was good and takes a little bit of pressure off the fourth quarter to reach the levels they’ve talked about.”

Immelt struck an optimistic tone on the company’s earnings conference call,  noting the “improving global business environment,” which heartened investors whose confidence was shaken by the debt ceiling drama.  

Profit from continuing operations fell 3% to $3.7  billion, or 36 cents per share, compared with $3.3 billion, or 32 cents, a year earlier. Sales fell 1% to $35.7 billion.  Wall Street analysts expected profit of 35 cents on revenue of $36 billion. Investors, though, overlooked the revenue miss since the company’s earnings overall were good.

Gains in Power & Water, Oil & Gas, and Aviation helped pushed profit at General Electric’s industrial segment by 11% to $3.97 billion. GE’s has recently won some huge orders including a $1.9 billion deal with Algeria’s Sonelgaz for 6 power plans, a $600 million machinery order for Russia’s Yamal liquefied natural gas project and a $2.5 billion list price order from Lufthansa for the new GE9X engine for 34 Boeing 777-9X aircraft.

Even GE Capital, which has long been an area of concern for investors, did well. Profit rose 13% to $1.9 billion while revenue slumped 5% to $10.67 billion. The business ended the quarter with a Tier I common ratio of 11.3%, up 116 basis points.

GE sees better times ahead.   The Power & Water business, GE’s largest, is expecting business to pick up in the second half of the year.   Profit in the quarter rose 9% to $1.29 billion while revenue slumped 10% to $6.49 billion. The company’s Oil & Gas and Aviation divisions each posted double-digit gains in profit and revenue.

Shares of General Electric, which has divested its NBCUniversal business and is planning to exit retail lending,  have gained about 18% this year, underperforming Honeywell (NYSE:HON), which gained 37% and United Technologies (NYSE:UTX), which has surged 32%. Wall Street sees better times ahead.  The stock is trading at a 12% discount to its average 52-week price target at $26.43. United Technologies shares are 8% under its average target of $116.65 while Honeywell is trading about 5% under its $88.65 average target.

The Bottom Line

General Electric is finally getting its act together, though it certainly took much longer than investors would have liked. The company’s 3% dividend yield is attractive enough to entice shareholders even though its stock trades at a price-to-earnings ratio of about 18, a five-year high. As investors become more confident that Immelt will be able to execute his strategy, the stock should rise, so the time to buy GE is now.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.


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