GE Reports Solid Profitability Gains
With GE's wide moat resting squarely in its industrial business, we're pleased to see the firm move toward its long-term goal of increasing its industrial earnings contribution.
Commentary
General Electric's (GE) third-quarter results reflected progress in the company's efforts to streamline costs and reposition its portfolio in support of core industrial businesses. The industrial segment exhibited 4% year-over-year organic growth, contributing nearly $26 billion in revenue in the quarter. While this represented a sequential decline in organic sales growth, emerging-market distributed power project delays were largely to blame. Nevertheless, assuming fourth-quarter power and water shipments remain robust, GE should still meet its 4%-7% organic growth guidance for 2014.
Operating margins expanded 90 basis points year over year to 16.3% in the quarter, as ongoing corporate cost reductions largely offset the negative impact from weakness in the power and water segment. This year's initiatives to simplify the selling, general, and administrative cost structure have generated nearly 160 basis points of margin improvement, with GE on track to deliver nearly $1 billion savings by the end of 2014. In addition, service margin improvement of nearly 170 basis points year to date supports GE's rationale to invest in analytics, which we believe can drive long-term profitability as service capabilities expand. The quarter's results support our belief that GE's efforts to strengthen its core business are working, and we reiterate our $29 fair value estimate.
With GE's wide moat resting squarely in its industrial business, we're pleased to see that recently announced transactions support the firm's long-term goal of increasing its industrial earnings contribution. In our view, divesting appliances reduces GE's exposure to a notoriously cyclical, consumer-driven business segment. Furthermore, while supporting the growth of a GE Capital business unit appears counterproductive, the Milestone Aviation acquisition increases GECAS exposure to GE-powered helicopters, creating additional synergies between GE Capital's existing aircraft leasing arm and the aviation segment.
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