General Electric (GE – Free General Electric Stock Report), a Connecticut-based industrial conglomerate and financial services company, recently reported June-period results. It was a good quarter for GE, as revenues increased 2%, to $36.2 billion, and operating share earnings expanded 8%, to $0.39. The top-line figure was only about $100 million below most expectations, while the share-net number was in line with our target as well as with most other analysts' estimates. However, GE shares slipped in the hours following the earnings release.
Industrial segment revenues rose 7% overall, to $26.2 billion, thanks to internal growth of 5% and acquisitions. Orders in key growth markets jumped at a double-digit pace, and GE managed to report increases in six of nine regions, overall. Margins were about 20 basis points wider than the number reported in the year-earlier term, so segment profits rose 9%, to $4.2 billion.
At GE Capital (GECC), the top line slipped 6%, to $10.2 billion, and the business reported a small loss. The segment continues to execute its strategy of decreasing the size of its non-core portfolio. Indeed, on the heels of the announcement that GECC will be divesting the consumer bank in the Nordics, GECC stated that it is targeting the IPO of its North American Retail Finance unit (Synchrony Financial) for the end of July, the first step in a planned, staged exit from that business. We think a more-streamlined financial services arm will eventually lead to bigger profits here.
In other news, GE continues to move forward with the planned acquisition of Alstom's Power and Grid businesses. It will be the largest deal in the company's long history, at nearly $17 billion, and ought to close sometime in 2015. We surmise the complexity of the transaction, and the numerous parties involved, is a big reason why management has yet to narrow down the timeframe for the completion of the deal. Still, management remains confident that the addition of the Alstom assets will add $0.06-$0.09 to share earnings in 2016. This acquisition also accelerates GE's planned portfolio strategy to achieve 75% of earnings from the Industrial business by 2016. In addition, management stated that the company is also making good progress with its expense-reduction and simplification goals. Indeed, General Electric is on track to meet its goal of cutting $1 billion, or more, in structural costs this year.
Finally, GE continues to generate a healthy amount of free cash flow, and much of it is being returned to shareholders via dividends ($4.4 billion) and stock buybacks ($1.5 billion). The dividend yield is well above average, especially for an industrial conglomerate of this size, and the share count should continue dwindling in the coming quarters.
Investors on Wall Street bid GE stock slightly higher in early trading, as the positive news about the Industrial group and repositioning and restructuring efforts took center stage. We continue to recommend this neutrally ranked blue chip, thanks to its worthwhile dividend yield and decent long-term capital appreciation potential. However, investors should note that GE shares are much more volatile than the majority of their Dow-30 counterparts. As for our estimates, we are leaving them largely unchanged for now, and expect GE to report low- to mid-single-digit sales and share-earnings growth for the full year, though growth in the second half should be better.
About The Company: Founded in 1892, General Electric Company has grown into one of the largest and most diversified industrial companies in the world. With products ranging from aircraft engines, power generation, oil and gas production equipment, and household appliances to medical imaging, business and consumer financing, and industrial products, it serves customers in more than 100 countries. On a geographic scale, more than half of General Electric’s revenues came from overseas in 2013.