Image source: General Electric.
On Oct. 16, General Electric (GE +0.47%) released its third-quarter earnings, which showed that it can operate well in a challenging growth environment. Compared with last year, General Electric's core businesses reported a 16% increase in operating earnings in the third quarter, despite a top-line sales decrease of 2%.
Along with the release, GE hosted an earnings conference call with Wall Street analysts and investors to discuss its results and plans more in depth. Here are five key takeaways from the call.
1. Alstom will drive future earnings and improve competitive positioning.
After prolonged period of review, GE received approval from U.S. and European regulators to acquire Alstom in early September, and management expects the deal to close in the fourth quarter. CEO Jeff Immelt spent time during the call to remind investors about the value this deal brings to GE:
Financially, we still expect to achieve $3 billion of synergies with $0.05 to $0.08 of earnings [per share] accretion in 2016 and $0.15 to $0.20 [per share] by 2018.
Alstom grows GE's installed base by 50%. In addition, they will substantially improve our position in renewables and grid. Alstom will achieve a strong return for investors and we will give you more operating details on Alstom at a special meeting we plan to hold in late November.
2. Margins continue to be a great story.
GE's industrial operating margins have expanded for 10 straight quarters, and Immelt believes that the company has the momentum to continue driving margin improvements -- a key focus area for management because it helps fuel the company's earnings:
Segment op margins grew 100 basis points with growth in gross margins of 80 basis points and we've expanded our value gap by $300 million year to date and expect this to continue. Our product margins are expanding, and the analytics continue to drive productivity and services. Restructuring is delivering substantial benefits and, in all, we think our margins can continue to grow.
3. It's probably going to take a while to lose the SIFI designation.
As previously noted, GE plans to apply to have its designation as a systemically important financial institution, or SIFI, removed in the first quarter of next year. Losing SIFI status would relieve GE from scrutiny under Basel III financial regulations and improve its operating flexibility. It's an exciting prospect for investors to consider, because it may allow the company to have more available capital to spend on buying back shares, increasing dividends, and investing back into the business.
However, GE isn't banking on losing its SIFI status anytime soon.
During the earnings call, GE Capital CEO Keith Sherin made this point when responding to a Wall Street analyst about whether its Tier 1 common ratio, a measure of financial strength that's directly tied to its SIFI status, would remain at a 14% threshold for the foreseeable future:
I think [losing SIFI status is] going to take some time. And then when we get done it with that, we still have our international regulators. So I think you should assume that that's a threshold for some period of time for us, and we need to continue to exit the businesses in a rapid pace and build the capital, so that we can distribute it back to the parent.
4. Are growth markets entering a recession?
Because of a tough comparable that included large jet engine and locomotive orders, GE's total orders fell by 26% year over year in the third quarter. This prompted an analyst to ask during the Q&A session whether growth markets were at risk of entering an industrial recession.
Immelt didn't seem to think so:
What I would say, kind of going around the world, is U.S. gets a little bit better every day. Europe is appreciably better. Meanwhile, growth markets are highly differentiated in terms of their performance and have some headwinds as it pertains to oil prices and things like that.
On balance, Scott, we see as much activity as we've ever seen. The quoting activity, the deal activity, things like that, is still quite robust.
Business for us in China is still pretty good, which is a big market. And so we still see a fair amount of opportunities out there, even among the volatility.
So I really believe that we can still accomplish our long-term goals in the world we see today. And then I would just remind you that we've got $200 billion backlog of services; it's 70% or 80% of our earnings. It's growing organically 8%. So we've got a pretty robust underpinning of the total company as we go forward. But the quote activity is as robust today as it was six months ago or a year ago.
5. Sizing up acquisitions
When fielding a question about the potential for future oil and gas acquisitions, Immelt shared how management currently frames making acquisitions:
"I think as we look at opportunities and where we are today, anything would have to hurdle above buying back our own shares. And so we'll be opportunistic, we'll be disciplined, and we have an alternative that we think is still quite attractive for us of buying back our own shares."
In other words, an acquisition target would have to produce a return over and above what GE can seemingly earn from buying back its own shares.
The bigger picture
GE revealed its plan to divest the majority of GE Capital and become a more streamlined industrial company about six months ago, and it has since announced approximately $126 billion in deals. With this transformation in full swing, the integration of Alstom on the horizon, and the prospect of continued margin improvement and losing its SIFI status, there's a lot for GE investors to be excited about the future.
