It's hard to make the case that General Electric (NYSE:GE) isn't necessarily the best bellwether for the industrial economy, but I'm going to do it anyway! The argument is that the company's profitability is skewed toward a few large sectors of the economy. Ultimately, a company like Emerson Electric (NYSE:EMR) may prove more indicative of the industrial sector overall, with Rockwell Automation (NYSE:ROK) providing a good proxy for capital spending in the manufacturing sector.
Indeed, understanding General Electric's profit drivers is the key to Fools answering another question. Specifically, just how did the company record 8% revenue growth in its industrial segment in the recent quarter?
General Electric outperforming its peers in the first quarter
The question is relevant because Emerson Electric is expecting underlying growth of only 3%-5% this year, while Rockwell Automation's forecast of 3%-6% growth is pretty similar. With this in mind, is General Electric likely to continue growing its industrial revenue at nearly double what its peers are doing?
The answer is possibly "yes" due to General Electric's mix of businesses, which give it good exposure to the areas of the economy that are doing well. In comparison, Emerson's broad end-market exposure makes it hard for the company to avoid the kind of moderate (but improving) growth that the industrial sector is undergoing on the whole. Meanwhile, Rockwell Automation reported an unusual quarter recently in the sense that it saw strength where others saw weakness (construction, emerging markets, and oil and gas) and forecast slower growth in strong areas like automotive (due its strong North American exposure.) Rockwell's story is more about its specific strength within certain markets than purely its end-market exposure.
Why General Electric is better exposed
A quick look at its industrial profits (the capital division contributed around a third of total segmental income) for 2013 reveals the importance of certain sectors to General Electric.
Power and water revenue was up 14%, and orders were up an impressive 9% (equipment orders declined 3%, but service orders increased 23%.) Moreover, equipment backlog grew 18% with service backlog up 2%. Furthermore, even though Europe remains "very, very soft," Fools should note that General Electric is about to anniversary some very weak numbers for European power and water sales last year. In fact, this was the problem area for the company in 2013. The good news is that the comparables are likely to be easier--note that power & water is the most profitable segment -- so Fools can expect continuing growth from the segment.
Aviation is one of the strongest areas of the industrial economy, and General Electric's 14% revenue increase is a testimony to that. Equipment orders were down 38%, but Fools need to appreciate that aviation orders are always lumpy. The orders pricing increase of 2.6% is a better indication of the underlying strength in the industry. In addition, service orders increased 10% in the quarter, and there is little doubt that the segment will report good growth this year.
The most disappointing segment in the quarter was undoubtedly health care. The sector is unusual in that the emerging world seems to be trending relatively better than the developed world within it. This is not to say that growth rates are higher in the emerging world, but rather that prospects are trending better. General Electric's health care revenue declined 2% in the quarter, and the following commentary from CEO Jeffrey Immelt should alert Fools to some possible disappointment in the sector:
[The] first quarter in the U.S. was soft. Hospitals and clinics appear to be delaying purchases and responses to the ACA. Patient inflows, outpatient visits, ER, surgeries procedures were all down 1% to 1.7% in a quarter ... The business expects the U.S. softness to probably persist in the second quarter
In other words, look to the emerging markets for growth in spending on overall surgical procedures, rather than the U.S.
The last of the big four segments in oil and gas. As with aviation, major oil and gas capital expenditures tend to be lumpy. Indeed, the company's oil and gas revenue increased 27%, but orders were down 5% with equipment orders declining 17% and service growth down 11%. Moreover, there are fears in the marketplace over the outlook for capital expenditure plans of the integrated majors, as they facing rising costs and flattish oil prices.
General Electric's answer to these fears is to stress that the national oil companies (which are usually in emerging markets) continue to spend. Furthermore, Immelt outlined that the company was investing in areas like subsea, LNG, and turbo machinery, all of which are seeing greater-than-industry growth in spending.
The bottom line
The industrial sector, according to Emerson Electric and Rockwell Automation, is only seeing mid-single digit growth. However, General Electric's key profit centers and segment dynamics are seeing it grow revenue and earnings at a faster pace. Healthcare was somewhat disappointing, but elsewhere there are good signs that its long cycle business can continue to do well. Meanwhile, its short-cycle businesses should see a bounce due to an improvement in the weather. All told, General Electric can outperform the industrial sector.