For a company as large as General Electric (NYSE:GE), it's basically a given that every quarter will have both good and bad news. Although GE's margins are a cause for concern, and perhaps part of a broader worry about whether corporate America has seen the best of this metric, the order rate is still solid and the company has gone a long way towards fixing the mess left from the credit crunch. (For more, read Earnings Power Drives Stocks.)
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Mixed Results for the Third Quarter
GE's reported consolidated revenue fell just slightly, with reported revenue from GE's non-finance operations down about 2%. On an organic basis, though, GE's industrial revenue rose about 8%. Growth was quite strong in the energy, oil/gas and transportation segments, while the home and business segment,which includes appliances, was fairly weak.
Profitability was not as impressive, though. Reported operating income was up about 15%, but that included a fairly sizable contribution from the improvement at GE Capital. The industrial business, though, saw profits drop about 1%. On the other hand, adjusted operating earnings from continuing ops were up about 11%. All in all, GE continues to make progress, but shareholders cannot rest too easily with those margins.
Getting Rid of Some Expensive Capital
GE continues to make progress in fixing up GE Capital and restoring it to a positive contributor to the corporation. Circumstances have improved enough that management was comfortable redeeming the special preferred stock it sold to Berkshire Hathaway (NYSE:BRK.A), during the worst of the credit crisis; funding that GE badly needed at the time, but that represented very expensive capital.
Along similar lines, the company has continued to pare down the balance sheet at GE Capital. While provisions ticked up a bit, it does not seem so long now, before GE Capital can contribute meaningful dividends back to the company again. (To discover the importances of dividends, read How And Why Do Companies Pay Dividends?)
Orders Are Good, but How Profitable Are They?
Industrial orders were up about 16% this quarter, good growth even if down sequentially. The question, though, is whether GE is going to be able to get the profitability, or the Street, it expects from this business.
The wind power business, for instance, holds a lot of future promise, but pricing is fairly rotten right now and GE, Siemens AG (NYSE:SI) and Alstom (OTCBB:ALSMY) are all paying for it. Business is a little better in gas turbines, though, as companies like GE and SPX (NYSE:SPW) seem to be past the worst of the industry, working through excess capacity.
It's a familiar story, though, in other industry categories. Oil and gas seems to be picking up for GE, Emerson Electric (NYSE:EMR) and Dover (NYSE: DOV), and expectations for aviation suppliers like Honeywell International (NYSE:HON) and United Technologies (NYSE:UTX) are moving up.
On the flip side, health care is still not strong. GE is actually doing a fair bit better than the likes of Danaher (NYSE:DHR), Philips (NYSE:PHG) and Hologic (Nasdaq:HOLX), but underlying demand is still below par. Not surprisingly, the appliance business is still not very strong and while the company saw strong locomotive demand in its transportation segment, municipal transit could be a challenging market, as state and city budgets come under pressure.
The Bottom Line
Although GE has rebuilt itself over the past few years to be in good position to take advantage of multiple global growth markets, analyst enthusiasm has faded a bit. Earnings estimates for 2012 have moved lower, as have analyst price targets. To that end, if the company is going to struggle to show better margin leverage, it seems reasonable to assume a slower recovery back to past free cash flow margin levels.
Even in resetting expectations for lower margins, GE stock still looks relatively attractive. It pays a decent dividend and is cheaper, on a cash flow basis, than a simple look at the P/E or EV/EBITDA ratios would suggest. General Electric is not going to make anyone rich quickly, but patient investors can still play an attractive turnaround story that should gradually morph into a solid dividend growth name. (To learn more about dividend growth, see The Power Of Dividend Growth.)
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