Industrial and financial conglomerate General Electric (NYSE:GE) did a little better than expected with fourth quarter results, but overall revenue and order trends suggest that the company really hasn't separated itself from the industrial pack. It's relatively easy to argue that the company's fourth quarter performance takes some risk out of the guidance for 2013. But will there be enough momentum in business like aviation, health care and oil/gas to carry the shares to another market-beating performance in 2013?
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Positive Trends to Close the Year
GE had been guiding expectations lower recently, but the company's ultimate fourth quarter results were solid. Moreover, while the guidance didn't point to a blowout 2013, the goals management has laid out seem credible.
Revenue rose 4% as reported, with 4% growth in the industrial business. All told, industrial revenue came in close to 2% better than analysts expected. While there were ups and downs on a segment basis, there were no major misses. The largest segments all showed growth - power/water up 2%, aviation up 11%, health care up less than 1% and oil/gas up 11%.
Industrial profitability was also solid, growing 12%. Industrial margins increased 130 basis points (BPS), with a value gap of 80 BPS and dispositions of 60 BPS contributing the most. While home/business and energy management showed the greatest segment profit growth, aviation and health care showed significant improvements in segment profitability.
GE also continues to show progress with GE Capital. Revenue rose 2% as GE Money grew and commercial leasing contracted, while returns on assets and equity both improved. Yields shrank both sequentially and annually, but the company's Tier 1 capital ratio remains above 10%.
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Challenges in Power Gen and Health Care, but Strong Demand in Oil/Gas and Aviation
GE is structured in such a way that usually a few businesses are on the rise while others are struggling. Power generation, for instance, saw some real weakness even outside of expected declines in wind orders, and that's not great news for SPX (NYSE:SPW). Likewise, health care has become choppy, and that speaks to an uncertain environment for other big-ticket health care players such as Siemens (NYSE:SI), Varian (NYSE:VAR) and Philips (NYSE:PHG), though GE's emerging market business has been looking pretty solid.
Aviation and oil/gas continue to enjoy good growth. Within aviation, the weak trend in spare parts has stabilized, while new equipment orders were up in the teens - likely a good development for both Honeywell (NYSE:HON) and United Technologies (NYSE:UTX). Likewise in energy, where equipment orders have been solid and it looks like GE is gaining share in subsea.
Past the Worst in Capital?
GE Capital also looks to be back on firmer footing - at least enough that regulators signed off on the company's acquisition of Metlife's (NYSE:MET) banking operations. That said, a sluggish economy and tightening spreads are likely to limit the company's ability to grow in 2013.
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The Bottom Line
GE has looked like an OK pick for a little while now, and its performance has backed that up. The company beat the S&P 500 by a bit in 2012, and I believe that the strength in aviation and oil/gas can keep the company on the right side of average in industrial company growth in 2013. What's more, while I think both power gen and health care could be in for more choppiness in developed markets, long-term emerging market growth potential is still quite strong.
It doesn't take particularly robust assumptions to drive GE's fair value. If GE can grow its revenue at a long-term rate of 3 to 4% and get back to low-teen free cash flow margins, the shares should trade in the mid-$20 range. While that may not make GE the cheapest industrial around, the company should be in better shape to return more capital to shareholders and may have more upside from those aviation and oil/gas operations.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.
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