Image source: General Electric.
Last month, General Electric's (GE +1.63%) fourth-quarter earnings showed that the company is executing well. The massive transformation to divest the majority of GE Capital remains ahead of schedule, and GE grew adjusted earnings 27% year over year despite flat revenue growth due to a challenging global growth environment.
Along with the earnings release, GE hosted an earnings conference call that gave investors an opportunity to hear directly from management about the underlying health of its business. There were five main takeaways from the call.
1. The world may be volatile, but there's still plenty of opportunity out there for GE to hit its goals.
Early on the call, CEO Jeff Immelt reiterated his view that the world economy is currently in a volatile and low-growth period. However, Immelt also noted that emerging market activity hasn't screeched to a halt:
Clearly oil pricing is a concern and will have an impact. But our organic orders growth in the Middle East were up 14% in the quarter. So our economic activity is ongoing. I know there is a concern about emerging markets in total, but our [total] organic [operating profit] growth was up 7% in the quarter ex-Alstom. And our business in China grew slightly organically in the year and backlog grew by 11%.
So we are seeing a lot of the economic volatility, but there is still enough business out there for GE to hit its goals.
2. China has many layers.
During the question and answer segment, GE's management fielded a question about China's economic slowdown, which has caused significant jitters in the stock market this year. Immelt believes there isn't "one China," and instead are many different ways to think about China's economy today. That's likely because China's slowdown hasn't translated into across-the-board weakness for GE's China exposure:
Yes, look, I think for us the first thing I'd say: there's no one China, right? I don't think macro anymore when I talk about China. I think micro. I think about Aviation, Healthcare, Power, Mining. That's how I think everybody's got to start thinking about China.
Now, Aviation remains super strong, right. I think on the Power side it's going to become more predominantly a gas turbine market. It's been cyclical, but I like how we're positioned in the future in China there. The third business is Healthcare. Healthcare has had a tough couple years. I think the sense of our team is that we feel that's stabilizing. By tough I mean it's gone from up 10% to 15%, maybe flat to down slightly, right. So our team I think has seen some signs of stabilization there. That [healthcare] to me is the swinger, let's say, on China.
But Aviation is super strong even today.
3. GE is well equipped to navigate a tough global economy.
Immelt took time to remind investors that GE has advantageous qualities to help it weather a turbulent economy. It boils down to the industrial giant's size, global reach, resources at its disposal, and diversified business model:
We have the ability to finance our Industrial Products, which is a huge advantage.
Our diversity in both regions and markets allows us to outperform single-purpose competitors. We can move production to the lowest cost regions and capitalize on currency or excess capacity.
We have all the elements to help ourselves in a tough economy: buyback capacity, substantial restructuring funding, and Services growth. And we've continued to invest. Our long-term commitments for R&D, globalization, investments like Alstom have built a huge backlog.
4. The impact of $30 oil will most severely affect 15% of GE's oil and gas segment.
GE expects its oil and gas segment will see its 2016 revenue fall 10% to 15% over 2015 levels. With $30 a barrel oil now a reality, a question was raised if there's the potential for the segment to experience further downside. As CFO Jeff Bornstein explained, the majority of GE's oil and gas segment is driven by longer term contracts and projects, and the most susceptible part of the segment represents 15% of its revenue:
If you think about the [oil and gas] business, our long-term, more contractual, and project-based stuff -- turbomachinery, Downstream, and Subsea -- that's [expected to generate] about 65% of our revenue in 2016. And of those revenues, more than 70% of those are in backlog. If you add the M&C [measurement and control] business on top of that, which tends to be more flow and convertible, but it's about roughly 50% exposure to Oil & Gas and 50% to non-Oil & Gas. That's 85% of revenue; and when you get M&C you've got about a little bit north of 65% of next year's revenues in backlog.
So to Jeff's point, the real short-term exposure -- today anyway, as we look at it -- is Surface and Drilling, and they are very susceptible to volatility around what they see for convertible demand in any period of time. But it's 15% of the revenue.
5. Mitigating currency headwinds
When the U.S. dollar rises, other currencies become weaker and translate to fewer dollars. In 2015, the rising dollar negatively affected GE's earnings by $0.05 per share, or about $500 million. On the call, Bornstein gave investors a clear picture of its currency risks around the world. Beyond hedging currency swings, GE conducts some overseas business in U.S. dollars, which essentially transfers currency risk to its foreign customers:
What we do in China, there's been very little -- albeit a little bit more lately -- the differences in exchange between the US and China are pretty de minimis. A lot of our businesses, like Aviation, are dollar-based. Then obviously in Oil & Gas and a number of Energy Management and a number of our other businesses we do work in local currency. So Brazil, where we're in Brazil and Europe and the euro we've had a little bit of a currency impact, and that's what you hear us reporting when we give you reported versus organic. On the orders front, I don't think we've seen that big an impact.
A big execution year ahead
Management made it clear on the call that 2016 will be a big execution year for the company as it continues divesting the majority of its GE Capital business, integrating Alstom, which was noted to be a complicated process, and operating in a challenging growth environment. Although GE has its work cut out in 2016, management's recent record of execution bodes well for the company's ability to deliver on its promises.
