GE Earnings A Mixed Bag

Industrial giant General Electric (NYSE:GE) has reported fourth quarter earnings. GE’s earnings were mixed with the company topping profit estimates but falling below revenue expectations. GE reported revenue of $33.89B, 1.4% Y/Y growth but substantially lower than the consensus of $35.92. GE reported a huge 22% jump in profit to $6.28B, or EPS of $0.64. Adjusted earnings clocked in at $0.52, exceeding the consensus of $0.49.

The main highlight of the earnings report, however, was GE’s core industrial segment. GE is fast moving back to its core industrial business through a mixture of divestitures and acquisitions. The company reported that its industrial segment posted a 7.8% decline in operating profits to $5.5B, with declines across all its sub-segments except the aviation and transportation businesses. Low oil and gas prices are to blame for the poor performance by this key segment. GE’s oil and gas unit posted a huge 16% decline in revenue in Q4 and 14% for the entire year to $16.45B.

Other than the oil and gas profit drag, other growth metrics here were good: industrial margins expanded 80 basis points, while 2015 industrial CFOA (Cash from Operating Activities) increased 8% to $16.4B.

There is a likelihood that GE might decide to shed some of its oil and gas businesses in the near future. The company announced that it has doubled its 2016 restructuring budget from the $1.7B it announced last month to $3.4B with an emphasis on oil and gas operations as it looks to combat the effects of low oil and gas prices. The oil and gas business is currently GE’s fourth largest (12.8% of overall revenue), and a divestiture of some of its businesses here would likely result in a significant contraction in the company’s revenue. This is however a short-term effect.

2016 Outlook

The general outlook for GE’s industrial segment sans oil and gas is good. GE's industrial orders grew 3% organically to $32.5B while order backlog grew 18% organically during the quarters and now stands at $315B. The Power unit, GE’s largest sub-segment, saw organic orders jump 29%.

GE managed to divest GE Capital assets worth $157B in 2015. The unit now contributes just 7.6% of the company’s revenue down from ~ 30% a couple of years ago. The financial segment has historically contributed more than 40% of GE’s operating profits, but posted an operating loss of $1.62B during the fourth quarter due to restructuring charges. GE’s operating profit, therefore, is likely to improve substantially once it completes winding down this lending business during the current year.

GE reaffirmed its earlier 2016 guidance of operating EPS of $1.45, to $1.55; 2%-4% organic revenue growth, cash generation of $30B-$32B, core margin expansion, and a total of $26B returned to shareholders in the form of dividends and share buybacks. This in effect means that 2016 will more or less be like 2015 when GE returned a record $30B to shareholders in $21B in buybacks and $9B in dividends.

Investor Takeaway

Given the slow growth environment that GE and other industrials are currently operating in, it’s fair to say that the company’s quarter was quite good. GE shares only slid 1.6% despite the revenue miss as investors picked the gems in the report, notably the healthy organic growth in industrial orders.

GE shares remain a good investment in 2016.