GE Falls as Energy Margins Temper Profit Gain Led by Finance

General Electric Co. (GE) dropped in New York trading as tighter profit margins in industrial businesses from energy to aviation overshadowed third-quarter growth led by a rebounding finance unit.

GE fell 1.9 percent to $16.31 at 4 p.m. even as most U.S. stocks advanced. Profit rose 11 percent and adjusted earnings of 31 cents a share matched analysts’ estimates, the first time since 2008’s fourth quarter that GE failed to beat projections on that basis.

Chief Executive Officer Jeffrey Immelt is shrinking the finance unit at Fairfield, Connecticut-based GE and expanding industrial businesses, in part with spending on research and development and new plants, because investors value manufacturing more highly.

“Margins hit a low for the year in the third quarter,” Immelt said on a conference call. “We expect improvement in the fourth quarter. Energy is a big driver.”

GE reiterated that margins this year will probably trail expectations, with “solid” growth returning in 2012, bolstered partly by lower research spending as a percentage of sales and improving results from acquisitions and services.

“That really is the margin story,” Immelt said.

Earnings Growth

On a companywide basis, GE Capital’s 79 percent gain helped push earnings from continuing operations to $3.4 billion from $3.06 billion, or 28 cents a share, a year earlier excluding pension costs, GE said in a statement. That marked the sixth straight quarter of profit growth.

Earnings were helped by tax rates that were lower than GE initially projected. Excluding the NBC divestiture, the company’s consolidated year-to-date rate is 18 percent, compared with a previous estimate in the low 20s, Chief Financial Officer Keith Sherin said on the call. The full-year rate may be 19 percent to 20 percent.

Revenue from industrial businesses climbed 19 percent, fed by growth in markets such as China and India. Manufacturing yielded less profit than a year earlier as energy infrastructure, the largest industrial segment, shipped older orders for lower-priced turbines and GE Aviation invested in research and development.

Declining profit margins in oil and gas, energy, aviation and health-care units underscored “our concern that there is little or no operative leverage in GE’s portfolio due to low- priced equipment in backlog and research and development headwinds,” Jeff Sprague, co-founder of Vertical Research Partners in Stamford, Connecticut, said in a note to clients.

Stock Performance

GE was one of only two companies to fall among the 30 in the Dow Jones Industrial Average, which rose 2.3 percent. The shares also were among the worst performers in the S&P 500, which rose 1.9 percent to the highest level since Aug. 3. GE’s 11 percent tumble this year has outpaced the Dow and the S&P 500.

Profit in energy infrastructure, which is absorbing $12 billion in acquisitions, slipped 9 percent, more than the average estimate from four analysts including JPMorgan Chase & Co. and Goldman Sachs Group Inc.

The wind business alone drove energy’s profit margin down by 2.9 percentage points, Sherin said. Acquisitions cut 0.6 point while investments and other items slashed 1.3 points.

In the three months through December, wind “is still going to be a drag, but not as much as in the third quarter,” Sherin said in a telephone interview. “The fourth quarter will be better.”

Energy Growth

GE’s order backlog rose to a record $191 billion through September from $189 billion in the previous three-month period.

“I particularly like the backlogs and how they are positioned,” Immelt said on the call. “A lot of our positioning is in growth markets.”

Per-share profit will begin “double-digit growth,” increasing at least 10 percent, starting next year, GE said. GE expects to get about 60 percent of its annual revenue from overseas this year, up from 53 percent last year.

Companywide results exclude pension costs and an expense of $881 million, or 8 cents a share, to repurchase preferred stock sold to Warren Buffett’s Berkshire Hathaway Inc. as financial markets froze in October 2008.

Including the cost of repurchasing the Berkshire Hathaway stake and other expenses, net income climbed 57 percent to $3.22 billion, or 22 cents a share, from $2.06 billion, or 18 cents a share, a year earlier. Buying back the Berkshire stake will add 3 cents a share to yearly earnings, GE said.

Berkshire Stake

The GE Capital business, which began to be regulated by the U.S. Federal Reserve in July, expects to resume its dividend payment to the parent company in 2012, Sherin said. That return is tied to the Fed’s assessment, he said.

GE Capital Corp.’s Tier 1 common ratio, a measure used by regulators to gauge financial strength, rose to 11 percent from 10.4 percent in the second quarter.

Revenue at the parent company climbed 12 percent to $35.4 billion, excluding the sale of NBC Universal, GE said. That topped analysts’ estimates of $34.8 billion.

Cash of $91 billion on GE’s balance sheet as of Sept. 30 was unchanged from the previous quarter. Immelt said he remains focused on small deals and increasing the dividend, which returned to growth last year.

Decisions on increasing the investor payout won’t be affected by the Fed’s timing on GE Capital’s dividend to the parent company, he said.

“We will continue with the balanced and disciplined capital allocation approach,” he said. “We will be selective in terms of where we do M&A and buybacks.”

Development Costs

Immelt has doubled research and development at the industrial units and is building new businesses in areas such as mining equipment. A new plant in Texas, announced this week, will build motorized wheels for off-highway vehicles.

The energy business is targeting profit growth of 10 percent next year, executives said in September. Earnings this year should be about $7 billion, compared with last year’s $7.3 billion.

Orders for gas-based power generation are rising and prices for renewable sources like wind, biogas and solar are stabilizing. The company said it expects improvement in industrial margins, including energy, in the fourth quarter.

Order Book

“We’re pleased that we’re seeing orders translate into sales, and we’re seeing that translate into year-over-year growth,” Peter Klein, a portfolio manager at Fifth Third Bank in Cleveland, said in a Bloomberg Television interview. “The order book is continuing to be very solid.”

Industrial operations generated $6.5 billion cash in the first nine months, down 35 percent from a year earlier.

The energy division’s sales climbed 30 percent to $10.9 billion, while revenue gained at all of the other industrial businesses except for Home & Business Solutions.

At GE Aviation, development costs for the GEnx jet engine, shipped with Boeing Co.’s 747-8 jumbo jet and 787 Dreamliner, cut into profit margins from 10 percent sales growth.

Aviation orders increased 14 percent to $5.7 billion, fueled by rising engine demand for commercial and military planes. The unit’s equipment backlog expanded to $21 billion, GE said in a presentation.

For the full year, GE projects growth from existing industrial businesses of more than 5 percent as well as gains in GE Capital, Immelt said on the call.

“In 2012, we should have both solid organic growth and expanding margins,” he said. “We are well-positioned in this volatile environment.”

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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