General Electric (NYSE: GE ) , one of the world's largest companies by both sales and market cap, and economic bellwether for ... well, basically for everything, reported its Q1 earnings on Friday. So should the fact that GE stock sank 4% on the news worry you?
- Let's find out. On Friday, GE revealed that:
- Overall operating earnings increased 15%.
- Profits growth was seen in five of the company's eight business divisions.
Earnings from continuing operations -- i.e., backing out both putatively "one-time" restructuring costs and clearly one-time profits from the sale of its stake in NBCUniversal to Comcast (NASDAQ: CMCSA ) -- grew an even more impressive 17%.
However, sales were flat against the year-ago quarter, and actual cash generated from operating activities at GE dropped more than 90% year over year, to just $0.2 billion. For this, GE offered the weak explanation that it spent a lot in Q1 "to inventory build for second-half volume."
That doesn't bode particularly well for the future of GE stock, despite the implied assumption that management hopes to do more business in the second half of the year. It also doesn't seem to bode particularly well for the Dow Jones Industrial Average (DJINDICES: ^DJI ) regaining its recent highs, either. So what's behind the assumption that things will perk up in H2?
Well, for one thing, GE says its equipment orders were up 10%. As orders turn into completed sales over the course of time, that should translate into revenue growth. Oil and gas equipment orders in particular grew 24%, and -- kind of flying in the face of Textron's (NYSE: TXT ) warning about business jet sales earlier in the week -- GE says orders at its Aviation unit spiked 47% higher. We can probably thank booming airplane sales at Airbus and Boeing (NYSE: BA ) for that last one.
All that being said, there remains one substantial headwind to growth in GE stock: Europe.
CEO Jeff Immelt called out the continent by name in his sum-up of the quarter that was, uttering the dreaded "C" word -- "challenging" -- when describing the business environment in Europe. Industrial segment revenues in Europe dropped a depressing 17%, which seems to have taken management by surprise. Immelt noted that this weakness hurt its profit margins as well as its sales numbers.
Sadly, if GE's going to turn around in H2, it looks like Europe will have to turn itself around first.
For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE today. To get started, click here now.