General Electric Co. (GE) is targeting more than 10 percent earnings growth at its industrial and finance businesses next year, in part by driving up manufacturing profit margins.
GE expects to raise the margins by as much as 50 basis points from this year’s 15 percent in both 2012 and 2013 by focusing on materials costs, reducing development time for new products and shrinking the “footprint” in Europe, Chief Executive Officer Jeffrey Immelt told shareholders during a meeting today in New York.
“We’ve got a funnel that’s bigger than that,” Immelt said, referring to margin-growth potential as the Fairfield, Connecticut-based company targets about 200 basis points total. “We’re working on that.”
Immelt, who tripled research and development funding in recent years to more than $5.5 billion in 2011, named areas in which the company plans to take market share, including narrow- body aircraft engines where the company already dominates via its CFM partnership with Safran SA of France.
CFM won $4.7 billion in contracts today to power Boeing Co. 737 planes purchased by Southwest Airlines Co. in the biggest aircraft order ever.
Research and Development
Research and development investments have “hurt our margins this year, for sure, but now the fruits of our labor are going to pay out,” Immelt said. “We feel good about our positioning here.”
Shipping more equipment including wind turbines, locomotives and jet engines, driven by exports to emerging markets including the Middle East, will help drive down material costs and boost employment.
“We are going to have huge volumes in the U.S.,” Immelt said. “That’s where the productivity is going to come from. All-in, we’re going to have 13,000 new people in the U.S.”
The energy division’s large gas-turbine market share, which Immelt pegged at about 45 percent of the world market, may be bolstered by plans in the U.S. and in emerging markets such as China to replace coal plants with natural gas.
“There is so much work going on today in China in shale gas,” Immelt said. “I say a prayer every night, ‘Bless my family and find more gas in China.’ Those are my only two prayers.”
GE plans opportunistic acquisitions in 2012, limited in size to $1 billion to $3 billion, Immelt said. The company announced $8.9 billion in deals this year, Bloomberg data show.
“I’m a 30-year GE man,” he said. “For the vast majority of my career, doing $3 billion of acquisitions in a year was unthinkable. We’ve just, over the last decade, had to fix this baby up a little bit. We had to contemporize it, make it stronger and get faster growth.”
While GE is prepared for a “tough Europe” as the region grapples with a sovereign-debt crisis, it’s manageable, Immelt said. To prepare for a potential recession there, GE will restructure some operations this quarter, at a cost of 3 cents to 4 cents a share.
Areas likely to be pared back include sales offices in divisions such as health care and lighting, Immelt said.
At its finance unit, GE is continuing to reduce risk by curbing lending and shrinking the portion of the parent company’s profit derived from the business. Investors tend to value finance operations less highly than manufacturing.
GE will only stay in finance markets where it has a “strong competitive advantage over banks,” Immelt said. “There are places where we have bone-crushing competitive advantage and the middle market is one of them.”
Middle market clients with $10 million to $1 billion in revenue are becoming the largest of the core businesses at GE Capital. Executives say they have a competitive advantage there because of know-how that extends from finance to areas such as consulting contracts and bulk tire purchases.
The parent company should generate $30 billion in cash to spend on acquisitions, shareholder dividend increases and buybacks over the next three years, Immelt said.
GE raised its quarterly dividend last week by 13 percent, the fourth increase in less than two years. The payout, which rose to 17 cents a share from 15 cents, is payable Jan. 25 to shareholders of record on Dec. 27.
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