Please ensure Javascript is enabled for purposes of website accessibility

4 Key Takeaways From General Electric Company's Management

By Steve Heller - Aug 24, 2016 at 10:41AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Highlights from the industrial giant's second-quarter earnings call.

Image source: General Electric.

As usual, there were a lot of moving parts to General Electric's (GE 0.72%) recent second-quarter earnings. Among other things, GE continued to divest the majority of its financial services arm; it was granted permission to no longer be labeled as a systematically important financial institution by regulators; and Alstom contributed favorably to the company's revenue growth.

Along with its earnings release, GE's management team hosted a conference call to provide more clarity about what happened during the quarter, as well as GE's future prospects. There were four main takeaways from the call.

Digital orders on track to hit $7 billion this year

GE has made it a goal to generate $15 billion a year from software sales by 2020, a threefold increase from the $5 billion it generated in 2015. It's launched several product and service offerings that cater to its Industrial Internet of Things initiative. With the help of internet-connected sensors, big-data analytics, and real-time optimization, the Industrial Internet promises to improve the productivity of an industrial asset, whether it's an entire wind farm, a factory, a power plant, or an aircraft engine.

In the second quarter, GE CEO Jeff Immelt noted that digital orders increased 15% year over year, while revenue increased 17%. Immelt also highlighted that GE's Predix platform -- the world's first industrial-based cloud operating system that can harness the power of the Industrial Internet -- is exceeding adoption expectations:

We now have 54 [Predix] partners and 12,000 developers, which is ahead of plan. Recently we announced a partnership with Microsoft to put Predix on [Microsoft] Azure, and [partnered] with Huawei to expand in China. In addition, we launched major customer collaborations with Schindler, PSE&G, and the city of Tianjin. We are on track to hit $7 billion in digital orders this year.

Oil and gas trims more fat

GE's oil and gas segment continues to struggle from the fallout in oil prices and drilling activity. The segment's second-quarter revenue fell 22% year over year to $3.2 billion, and operating profits fell 48% to $320 million. In response to these ongoing challenges, CFO Jeff Bornstein noted that the segment plans to cut costs further to make its oil and gas business more competitive:

The team remains focused on their plan for about $800 million of cost actions in the year. Through the half, approximately $280 million of benefits have been realized, with stronger paybacks expected in the second half of 2016.

LEAP enters service

GE's next-generation LEAP jet engine, which was co-developed via CFM International -- a joint venture with Safran -- officially entered service just after the second quarter ended. The engine features 3D-printed fuel nozzles and advanced ceramic-matrix composite materials to help it achieve a 15% improvement in fuel efficiency compared to its predecessor. At the close of the second quarter, GE had a backlog of over 11,000 LEAP engines to fulfill.

During the call, David Joyce, CEO of GE Aviation, updated investors about LEAP's competitiveness and production schedule:

So let's talk LEAP: terrific product positioning, sole source on the [Boeing] 737 Max, on the Comac C919, and over 50% win rate on the [Airbus] A320neos. We delivered our first LEAP-powered A320neo to Pegasus on Tuesday, entering service this weekend. We are forecasting to deliver 110 engines this year, building to 1,900 by 2019. This year we also reached record levels of delivery on our current CFM engines, exceeding 1,700 engines. My point is that the rates for LEAP are not uncharted territory for CFM, and we are very confident in our plan to deliver on time.

GE Capital exit nearing completion

Since GE announced its plan to divest the majority of GE Capital in order to become more focused on its industrial businesses, the company has announced $181 billion in signings out of approximately $200 billion in expected asset sales. Of the $181 billion in signings, GE has closed about $168 billion.

On the call, Bornstein said he expects that the remaining assets will be signed by the end of the third quarter:

Of the remaining $25 billion assets to go, we anticipate that we will run off about $10 billion of assets where it makes more economic sense to do so. The remaining assets are comprised of our Italian bank, our French mortgage book, and other smaller portfolios and investments. That will be largely signed, we believe, by the end of the third quarter of this year.

In other words, once these final signings close, GE won't be far away from completing this massive divestment.

No changes to outlook

GE's organic revenue, which accounts for the impact of currency fluctuations, dispositions, and acquisitions, fell 1% year over year to $24.5 billion in the second quarter. Despite this weakness, Immelt has made no change to GE's full-year guidance, which calls for between 2% and 4% organic revenue growth:

Looking forward, we have no change to our framework for the year. We still expect organic revenue growth of 2% to 4%, with strong organic growth in the second half. We expect margins to expand and Alstom to deliver $0.05 a share. We still expect free cash flow plus dispositions to be $29 billion to $32 billion for the year, including a capital dividend of $18 billion. Year to date, we returned $18 billion to investors, and we are on track for $26 billion in the year.

The bigger picture

While GE's management team expect the world to remain a volatile place for the foreseeable future, they also believe that the company's diversified business model will help it reach its goal of earning $2.00 per share in operating profits in 2018. This year, GE expects to generate between $1.45 and $1.55 per share in operating profits. Clearly, management doesn't see macro volatility getting in the way of GE growing its profits.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$75.74 (0.72%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.