What General Electric Company Revealed About the Year Ahead

GE steamrolled through the first quarter, but here's what you need to keep an eye on during 2014.

Apr 19, 2014 at 11:00AM
Ge Logo

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.

Chummy Ge Employees

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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Isaac Pino, CPA 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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