Every month, it seems like a new story is unfolding at General Electric (NYSE:GE). First, a major energy acquisition; then a spinoff or two; and every now and again a development around its much-hyped "industrial Internet."
But all of these fit neatly into the same playbook for GE: The wheels are in motion to transform a bloated bank into a streamlined manufacturing powerhouse. A new-and-improved GE will, in turn, light a fire under the stock. Or at least that's how the theory goes, with one well-respected analyst seeing a 20% upside from here.
On Friday, we'll learn a lot more about how GE's transformation is unfolding when the company announces third-quarter earnings. Here are three key things to look for in the release:
1. Industrial-powered earnings growth
When GE reports, analysts and investors alike will fixate on earnings and revenue growth for the quarter. From a high-level perspective, here's what the expectations look like in those two key categories:
|Analyst EPS Estimate||$0.38|
|Change From Year-Ago EPS||5.50%|
|Revenue Estimate||$36.8 billion|
|Change From Year-Ago Revenue||3.10%|
Odds are, GE will hover around those estimates: In the past four quarters, only twice has GE topped earnings-per-share expectations, and both instances were by $0.01. Foolish investors should dig a little deeper, and evaluate exactly what is powering GE's business. Ideally, owners of GE's stock want to confirm that the company's growth is powered by manufacturing. To this end, management established a couple of important 2014 growth targets back in December:
- 10% overall revenue growth in industrial segments
- 4%-7% "organic" revenue growth in industrial segments
These targets hold GE's CEO Jeff Immelt accountable for steering the company in a new direction. Why does this matter to investors? Because, as I've noted before, the market will look more fondly on manufacturing versus banking earnings, thereby pushing up the stock's valuation over time.
Through the first half of 2014, GE has delivered on these goals. Industrial revenue growth reached a 10% clip through six months. Meanwhile, "organic" growth, which excludes growth through acquisitions, is up 6% year to date -- right in the sweet spot of GE's 4%-7% range. So far, so good, and I expect GE to remain on track in this department through the third quarter.
2. Sales, spinoffs, and synergies
GE's never been a company to shy away from a potentially lucrative deal, and it doesn't seem to have lost its appetite in 2014. Expect management to provide additional insight on the following recent transactions:
- A $1.78 billion purchase of a helicopter-leasing business by GE Capital.
- Alstom's power and grid business -- particularly how the integration is proceeding.
- The full Synchrony banking "split-off," which is expected to take place in 2015.
- Electrolux's purchase of GE Appliance -- specifically where proceeds will wind up.
With all of these moving parts, Foolish investors will want to keep an eye on GE's cash management plans. In recent years, Immelt has made shareholders a top priority, raising the dividend consistently, and announcing a 16% hike in 2014. Undoubtedly, GE will comment on dividends and buybacks, and perhaps it plans to up the ante in this department.
3. A slimmer and trimmer GE
As I mentioned after GE's second-quarter earnings, cost-cutting was a recurring theme throughout management's conference call. The company wants to decentralize decision-making to the business-unit level, while also saving a buck on general and administrative expenses at headquarters.
In a recent presentation, GE put some specific numbers around this effort: GE aims to reduce the sales, general, and administrative expenses that relate to industrial segments from 15.9% of sales in 2013 to 14% by year-end 2014.
For a company of this size, that's some serious trimming. We can look forward to insight on how it's shaking out thus far.
The takeaway for investors
The third quarter is particularly full of insight for GE shareholders, because management usually provides some indication of what we can expect to close out 2014. If industrial earnings seem to be outpacing growth on the financial side of the business, this should bode well for the stock.
Furthermore, as GE continues to simplify its operations, it will be easier to hold higher-ups accountable based on their specific business-unit performance. At the same time, GE will emerge as a simpler company for the market to evaluate. Overall, this is a promising effort that will pay off for shareholders over time.
Isaac Pino, CPA, owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.