What General Electric Company Revealed About the Year Ahead

Source: Wikipedia

The tech-savvy industrial powerhouse General Electric presented earnings on Thursday to an investor base hungry for good news. Two days prior, rumors had surfaced about current CEO Jeff Immelt potentially stepping down prior to his expected 20-year tenure. On top of that unsettling revelation, GE's shares were down nearly 8% since the beginning of the year.

Fortunately for shareholders, GE's first quarter of 2014 hummed along like clockwork, despite a shortfall in earnings per share due to one-time NBCU gains in 2013. What's more is the company provided a positive outlook for the year ahead, reaffirming many of GE's goals for 2014.

Upon a closer look at the earnings release and conference call, here are some of the most valuable insights from GE's latest report:

The equipment-to-services sales mix will tilt toward lower margins during the year
GE makes a hefty margin off of the service contracts that it sells alongside an equipment order. I've outlined this razor-and-blade model at GE before and believe it's crucial for the company to substantially expand earnings over time.

In the latest quarter, the mix in orders (not sales) was heavily weighted toward services, a promising sign for healthier future margins. Four out of six services segments were up double-digit amounts versus the prior year, while all six equipment segments were flat or negative.

At first glance, you might think this trend is a sign of future lucrative services contracts to come, but not so fast my friend. These contracts can take years to fulfill, so the near-term impact on margins will be meaningless. In fact, management came out and stated that the effect of a heavy equipment mix will be a challenge to overcome during 2014:

We know that we are going to grow equipment and revenue faster than services this year, and so mix will be an item for the year. We have to deliver on simplification, overcome that, and grow margins.

Energy will continue to be a driver of growth 
Just as the energy sector is fueling growth in the American economy, the same trend is unfolding within GE. With the power and water segment growing revenue 14% and profits 24% and the oil and gas segment posting 27% and 37% growth in those respective categories, these two industrial units were the backbone of GE's core businesses in the first quarter. While my Foolish colleague Travis Hoium points out that the domestic energy boom could subside in 2014, GE management seems bullish about the long-term global market:

The forecast is for global oil and gas demand to continue to grow through 2018, with oil mainly driven by the ongoing industrialization in emerging economies and the rise of living standards, while gas emerges across mainly all of the economies as a cleaner fuel source.

GE could go "elephant hunting" this year 
As the legendary value investor Warren Buffett is prone to say, "elephant hunting" is the favorite pastime of a massive conglomerate like Berkshire Hathaway. That is, when the right opportunity presents itself.

GE's been less inclined, however, to conduct any substantial one-off mergers or acquisitions unless they fell into the $1 billion-$3 billion range, a size that GE labels as a bolt-on target. This approach has provided GE with the flexibility to payout appropriate dividends and repurchase stock in a shareholder friendly manner. But, every once in a while, management's made an exception to its own rule, as was evident after the NBCU spin-off. It looks like that could be the case once more in 2014.

During the conference call, Immelt alluded to the idea that GE could go hunting elephants -- i.e. buying large businesses whole -- if the opportunity were to present itself (emphasis mine):

Our target remains $1 billion to $4 billion; but we have gone above on opportunistic deals that have excellent values, strong synergies, fit our growth strategies, and are immediately accretive. For instance, Avio was above our range and accretive to investors.

As an analyst noted, this is similar to the language GE used prior to the Avio buyout, and could imply GE's nearing a big deal. With an estimated $4 billion worth of its own asset sales planned for the year, GE will likely have enough dry powder on hand. And, who knows, with the annual shareowners meeting set for next Wednesday, it could happen sooner rather than later.

GE employees. Source: General Electric

What to watch for next week
The first quarter, on the whole, provided reasons to be optimistic about GE's 2014 road-map, but no major revelations were made within the report. Perhaps, with shareholders descending upon Chicago next week for the company's annual owners meeting, we'll learn more about what's in store for GE in the year to come. Whether the company will announce any major leadership changes or acquisitions is yet to be seen, but check back at Fool.com for full coverage in the event of a significant shareholder vote or management shake-up.  

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2014, at 9:29 PM, lnlemonlime wrote:

    You know what Isaac, it would be NICE if just for ONCE!! someone in the media would report the TRUTH about GE!!

    There is never any discussion on any website about what it is like to work at GE. How employees are driven to exhaustion, the low raises, the awful inner-upper management attitudes, the HUGE (2013) reduction in health benefits, the back stabbing, the corporate tolerated employee to employee bullying, the racism that prevails there, the meanness and the General unhappiness that prevails in this company. The outdated Six Sigma /Green Belt techniques that GE clings to... as long as people make money from the stock, no one cares about the constant lay offs, the uncertainty of being an employee for GE or their, here today, gone tomorrow attitudes of higher management. I know I was there, in 2 locations for a total of 9 years....it was and remains an awful place to work.

    They lay off and close shops and then the stock rises, how is this not a way to run a US based corporation. Get sick at GE!! well then... the employee is fired. Disagree with your boss, fired. Wear the wrong clothing, say the wrong thing ...yup...fired. It's just about any excuse to fire an employee, stay there too long....fired. Invent something they really want....yup....fired...try speaking about the cost of getting to the financial heights where GE is now. It came at a HUGE!! price on the backs of ALL of its current and former employees.

  • Report this Comment On April 19, 2014, at 10:46 PM, jweenst56 wrote:

    Thanks for the real comment, I worked for GE for almost exactly 30 years, my "new" manager was a real piece of work, right out of college, very sure of himself, and running a popularity contest for his promotions.

    Well, I did have a lot of verying experience at GE, this did not work well or in my favor. They kept pressing for faster and faster, shortcuts were taken, but those on the good list were never reprimanded.

    I was a senior employee and trying to develop a valid time saving change, unfortunately I did not go about the testing and implementation in the way that he wished. My method was valid, but because of his feelings towards me, he just let me go, even though at my 30 minute discussion with him and an HR represenstative, I had asked previously if I need a lawyer with me at the meeting, My manager stated No, as there would not be any action for that needed.

    I was fired 5minutes later with extreme prejudice, which means no unemployment paid, no compensation package, and you go on an unseen blacklist. Shorthly thereafter I could not get a job, we lost our home and had to live with our daughter.

    Please people GE has changed many lives, not always positive, I have seen a lot of other fully qualified technical people that GE just dispersed, it is extremely sad and depressing to be a part of that action, especially when they have means at the drop of a whim of someone with power.

    GE is a great company, especially because of all of the sacrices of long hours and personal efforts by great people, but GE ican be terribly run by people above those skilled people that have little or no people management skills.

    Thanks for hearing me out...have a great Easter

  • Report this Comment On April 20, 2014, at 10:43 AM, TMFBoomer wrote:

    @lnlemonlime and @jweenst56

    First off, I appreciate the comments and insight into your experiences as employees at GE. I have never worked at the company so I can't speak to the workplace environment. I actually applied at GE back in 2007 but in retrospect its probably a good thing the position didn't work out given the timing.

    All in all, I've heard my colleagues who worked at GE at one point or another share mixed feedback on the culture. Of course, that culture is also constantly changing and some of these former employees were recalling the days of Jack Welch, which seems like another era entirely.

    Fortunately, there are places where you can share your thoughts on GE as an employer like Glassdoor (http://www.glassdoor.com/index.htm). I constantly consult Glassdoor's website to see what's being said by employees about leadership and their ability to contribute to change and new ways of thinking.

    Right now there are 1,772 reviews of GE on Glassdoor, but not all of them are in-depth and detailed. And the latter are the ones that really stand out to me. I highly suggest you share your thoughts in a straightforward manner with as much detail as possible (w/o mentioning names, of course), if you feel so inclined.

    Our ticker pages on the Fool.com site link to Glassdoor so investors can have a more comprehensive view of the companies they're researching.

    As for my analysis, I will continue to strive to capture the intangible aspects of GE's business, to interview non-executive team members when possible, and to rely on the insight I encounter from everyday employees on sites like Glassdoor from time-to-time. Of course, I will also highlight the financial performance and business model as done in this article because, well, this is an investing-oriented site first and foremost.

    Ultimately, the investments that GE makes in the business as well as in fair employee compensation plans, for example, will come out in the wash (i.e. in the financials). I aspire to have a thorough understanding of all aspects of the company, so once again, thanks for your your thoughts and enjoy the rest of the weekend.

    Isaac

    @TMFBoomer

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