Predicting the future of a massive company like General Electric (NYSE:GE) can prove difficult. Should investors focus on economic growth, rising input costs, or perhaps emerging industry trends? All three can provide perspective, but the best near-term indicator is "order backlog." A swelling line of customers for GE's products bodes well for the future, while a sharp decline can derail a company's stock. Breaking down GE's year-end backlog can reveal where this company is headed for investors.
A growing line of customers
In recent years, all eyes have been focused on GE's ability to de-emphasize banking and build on the strength of its industrial businesses. So far, the company has proved quite adept at both. While revenue at its finance arm, GE Capital, declined 5% in the fourth quarter of 2013, industrial segment revenues climbed 6%. Meanwhile, within those industrial segments, earnings grew 12% and backlog orders increased by 8% during the fourth quarter. In all, GE continues to increase profits in the businesses with the most promise to pave a runway for future growth.
Will this momentum continue? The order backlog indicates that it should, so long as GE can keep up with demand. GE breaks down financial results for the industrial businesses into two areas -- equipment and services -- and demand for both has increased in recent years. To close 2013, GE's equipment backlog grew by 10%, whereas services grew by 5%. Altogether, these two categories delivered backlog growth of 8% for GE's industrial businesses. Here's a look at the annual backlog balance for the past five years:
Out with the old, in with the new
Most importantly for investors, GE's stream of orders came from what I believe will be the biggest drivers of its industrial profile in years to come -- the energy businesses. The company that became known as a "bank with an industrial arm" will increasingly look like a diversified energy company with a banking arm. This drastic overhaul makes a lot of sense, considering the fallout from the financial crisis and upward trends in demand for energy resources and infrastructure in emerging markets.
Diving deeper into GE's energy businesses, the power and water segment outperformed the others by a landslide. Orders in power and water grew 81% for equipment and 8% for services. This segment alone contributed 34% of total backlog growth across all seven industrial segments for the quarter. If all goes according to plan, GE's fulfillment of these orders will mean that power and water become a more significant driver of both revenue and profit in the near future.
What it says about GE's future
On the whole, GE's latest earnings report revealed a company on track to meet expectations, which -- ironically -- left the market slightly underwhelmed. Shares of GE shed a few percentage points on Friday. A closer look, however, reveals a company executing well on a plan that has delivered shareholder returns in excess of 90% over the past half-decade. From my perspective, there's little reason to believe GE's upward trajectory will not continue.
In the long run, GE investors should be excited about increasing profitability, growth initiatives, investments in research and development, and a strong company culture. In the short run, however, there's probably no better indicator of near-term revenue growth than a healthy order backlog. At more than $240 billion, GE's bodes well for the stock.
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