What's Driving GE Earnings

General Electric (NYSE: GE  ) will report third-quarter earnings before market open on Friday. This $240 billion conglomerate has often acted as a bellwether for the broader economy, not only because of its size but also because, historically, the company seemed to dabble in every industry. In fact, GE has been criticized for lacking focus, having its fingers in too many pies. Lately, though, GE has been shedding non-core assets and focusing on its industrial roots. So which businesses are driving GE's earnings? Let's take a look.

First, General Electric is notable for what it's not doing. In the days before the financial crisis, it was easy to mistake General Electric for a large financial company with a captive industrial business, rather than the other way around. Under CEO Jeff Immelt, GE Capital has focused on stable, high-margin, mid-market lending. In 2011, the financial arm brought in lower revenue while actually delivering higher profits. Another quarter of a smaller but more profitable GE Capital would be a good indicator that General Electric's strategy to rein in GE Capital's size and focus on profitability is working.

General Electric has also shed its presence in the entertainment industry, selling 51% of the television, film, and theme park powerhouse NBCUniversal to cable operator Comcast (Nasdaq: CMCSA  ) in 2011. Comcast is the managing partner in the joint venture, leaving General Electric free to concentrate on its industrial ventures. Comcast is expected eventually to take full control of NBCUniversal, with Comcast reserving the right to buy up remaining shares and GE reserving the right to force the sale of its shares within seven years.

So what is General Electric doing? The NBCUniversal sale brought in $7.5 billion for GE, and it has used that capital, as well as cash from operations, to expand the company's presence in emerging economies and its core infrastructure markets. Most drastically, the company has aggressively expanded its presence in the oil and gas equipment sector, investing $11 billion over the past five years. It entered the drilling and production segment in 2008, and since then it has grown its orders from $10 billion to $16 billion.

Critics have lambasted GE's foray into oil and gas, pointing out that sustained low energy prices since the recession have lead to less demand for equipment and technology from producers. It's true that the industry has been tough recently, with the largest competitor in the space, Schlumberger (NYSE: SLB  ) underperforming the S&P 500 by nearly 25 percentage points since 2007. However, this slump has allowed GE to acquire assets and operators for a song. With a focus on long-term results, GE is buying in to a future growth story when the cycle is at a low point. Since GE is still investing heavily in its oil and gas segment, investors should look to revenue growth before worrying about profitability.

The bulk of GE's revenue comes from its mature power and water segment, with a strong brand and industry-leading technology helping the business to bring in $26 billion in 2011. GE leads the world in installed natural gas turbines, and as cheap, clean, natural gas displaces coal as an electricity source worldwide, GE views growth in this sector as inevitable.

GE Aviation is the world's largest producer of jet engines, and its $19 billion in revenue makes it the second-largest business in GE's industrial portfolio. Though GE expects cuts in defense budgets and a weaker demand for travel to inhibit growth in this market, GE Aviation has secured key customers like the Boeing (NYSE: BA  ) 787 Dreamliner. Boeing has more than 800 unfilled orders for the 787, and GE is one of only two suppliers of jet engines to the plane. Customers who have already requested the GE engine for their planes have helped GE Aviation amass an order backlog of $93 billion. This clear revenue visibility, as well as the aftermarket supply business that its large installed base gives it, should allow GE Aviation to enjoy stable sales even as the broader market contracts slightly.

Most of GE Healthcare's $18 billion in revenue comes from its medical equipment and information technology products, where it competes with fellow industrial conglomerate Siemens (NYSE: SI  ) . While GE still lags market leader Siemens in important high-value segments like magnetic resonance imaging equipment, it has been more aggressive than Siemens in expanding in emerging markets. GE is now the market leader in resilient technologies like portable ultrasound equipment that is changing lives in less-developed, rural markets.

GE sees vast growth potential in this segment; indeed, between 2009 and 2011, GE Healthcare's equipment sales from emerging markets grew from $1.5 billion to $2.6 billion. As Siemens has concentrated on higher-margin developed customers, it may find that GE has captured the future growth market. Investors should look for emerging market equipment sales to lead Healthcare revenue growth.

While these are GE's largest industrial segments, the company has investments in transportation, energy management, appliances, and industrial products, all of which will be reporting earnings tomorrow. Whether GE is leveraging technology and expertise to increase value across platforms, or whether the company's vast portfolio threatens to distract management can be difficult for investors to discern. To help you decide whether GE is a sound investment, the Motley Fool's top industrials analyst has put together a premium research report on General Electric. This report breaks down GE's multiple businesses, zeroing in on key risks and growth drivers, and comes complete with a full year of analyst updates. To get started, click here now.

Fool contributor Daniel Ferry owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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