GE Earnings Shows That Management Is Executing Well

Image source: General Electric.

General Electric's (GE 1.30%) fourth-quarter earnings were strong compared to the weak global environment. Excluding the majority of GE Capital, which GE is in the process divesting, fourth-quarter revenue increased 1% year over year $33.8 billion and translated to a 27% increase in operating earnings to $0.52 per share. Wall Street expected the industrial giant would generate $36 billion in revenue and earn $0.50 per share.

During the quarter, GE faced continued headwinds from oil, the U.S. dollar, and general economic sluggishness outside the U.S. Despite these headwinds, the company increased its operating margins, and its order backlog -- a proxy for future demand -- finished 2015 at record levels. This shows that GE continues to improve its productivity and manage costs, and its industrial products and services offer a compelling value proposition in a challenging -- and volatile -- environment.

Overall, GE's earnings reaffirm that management is executing well as it transforms itself into a simpler, more focused industrial company.

Signs of encouragement
There were several encouraging aspects to GE's earnings. For starters, its backlog of unfulfilled orders increased by 18% year over year to $315 billion, thanks to the Alstom acquisition, and by 7% without Alstom. Fourth-quarter orders increased 3% year over year to $32.5 billion or by 1% on an organic basis (excluding Alstom), with higher-margin service orders increasing 5% and equipment orders increasing 2%.

Ultimately, a sizable backlog acts as a buffer during periods of economic uncertainty and allows GE to better manage its cash flow.

Image source: GE.

With nearly 72% of GE's backlog tied to services, like maintenance packages for industrial equipment, its backlog is considered high quality, because services tend to be less sensitive to economic jitters. After all, it's easier to delay a new wind turbine purchase than it is to postpone maintaining an existing turbine because of global growth concerns.

On the margin front, GE's fourth-quarter industrial operating margins expanded 80 basis points annually to 18.3%, and by 110 basis points to 15.3% in full-year 2015. The expansion was driven by a combination of favorable mix between products and services, pricing power, and a slight increase in productivity. In terms of cash flow, GE's industrial businesses generated $9.8 billion in cash during the fourth quarter, an increase of 23% year over year. For the year, GE's industrial cash flow increased by 8% to $16.4 billion.

Major headwinds
The pressure facing GE's oil and gas segment intensified in the fourth quarter as the price of oil continued its decline. The segment's revenue fell 16% year over year to $4.4 billion, while its operating profits fell 19% to $715 million. This represented 13.9% of its industrial revenue and about 13% of its operating profit. The company plans to reduce oil and gas' expenses by $400 million in 2016 and is targeting an additional $400 million of cost cutting in the future to help offset the continued impact of low oil prices and production volumes.

On a full year basis, the U.S. dollar affected GE's earnings by $0.05 per share, or roughly $500 million, based on nearly 10 billion shares outstanding. Management expects the U.S. dollar will impact its earnings by $0.02 per share in 2016, assuming the greenback remains stable.

Promises delivered
During 2015, GE underwent a massive transformation. It began divesting the majority of GE Capital to exit the financial services business, acquired Alstom, the company's largest acquisition in history, and continued to execute well in a low-growth and volatile global environment. Even with all these moving parts, GE met or exceeded its big promises in 2015:

Data source: GE.

Looking ahead at 2016, GE expects to grow its earnings and operating profits, expand its margins, generate strong cash flow, and return lots of cash to shareholders. 

Image source: GE. CFOA = cash from operating activities.

Judging by GE's 2015 execution, investors have little reason to doubt management's ability to deliver on its 2016 promises.