A few weeks ago, General Electric's (GE -0.65%) second-quarter earnings showed impressive growth for the $280 billion industrial giant. Headline revenue increased 15% year over year to $33.5 billion, while its industrial + verticals operating earnings, which portrays how the company will look after it divests the majority of GE Capital, increased 65% to $0.51 per share.
The problem with using headline figures to tell GE's story is that they don't necessarily reflect how its underlying businesses are performing. After all, General Electric is in the midst of a massive restructuring to divest the majority of assets related to its financial services arm, GE Capital, and at the same time, it's working to integrate its largest ever industrial acquisition: Alstom. Let's also not forget about the eight industrial segments it operates.
Suffice it to say, there are a lot of moving parts to consider -- and a lot of different ways GE presents the information. After peeling back the layers, it's clear that the industrial environment is under pressure and GE's growth would be virtually nonexistent without the benefit of Alstom.
Growth for $10.1 billion
In an effort to bolster its renewable energy portfolio, emerging market presence, power generation installed base, and competitive positioning, GE purchased Alstom for about $10.1 billion last November. Since Alstom hasn't been under GE's control for a full-year, the company has favorable comparable sales figures to work with. It's the main reason why GE's industrial sales (non-GAAP) increased 7.7% year over year to $28.2 billion in the second quarter.
However, without Alstom's $3.2 billion revenue contribution, GE's legacy industrial revenue fell 4.5% to about $25 billion. Moreover, GE's organic revenue, which accounts for the impact of currency fluctuations, dispositions, and acquisitions, fell 1% year over year in the second quarter.
While it's a matter of perspective, the industrial environment either weakened slightly or rather significantly in the second quarter without Alstom.
A mixed bag
Another way to measure the overall health of GE's industrial business is to examine the company's backlog and order book, which together can provide a general indication of future demand. Ideally, if demand for GE's products and services were strong, its orders and backlog would have grown in the second quarter.
GE's total backlog grew to a record $320 billion, an increase 17% year over year, while its orders fell 2% to $26.6 billion in the second quarter. Excluding Alstom, GE's total backlog would've increased by 6% annually and its orders would've fallen by 18.5% -- an additional $4.5 billion. On an organic basis, GE's orders fell 16% during the quarter, suggesting that customer demand has notably weakened.
The big question
Although Alstom drove the majority of GE's revenue growth in the second quarter, it remains unclear how the unit will perform once it's been under GE control for more than a year. At that time, the company's previous year's results will include Alstom, meaning GE's industrial revenue will become comparable on an apples-to-apples basis. In other words, GE won't have the benefit of going up against a favorable comparable sales period.
Ultimately, Alstom's longer-term growth potential hinges on management's ability to leverage the acquisition in a way that adds value to GE's existing industrial base.