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GE Profit Surpasses Estimates While Sales Curbed by Europe

GE Earnings
Employees at the General Electric Co. healthcare unit's production facility work to assemble medical magnetic resonance imaging (MRI) devices in Beijing, China. Photographer: Nelson Ching/Bloomberg

General Electric Co. profit topped estimates after its industrial order backlog rose to a record $200 billion even as weaker demand in Europe hindered sales in health care.

Profit from continuing operations of 39 cents a share, excluding some items, compared with the 38-cent average from analysts surveyed by Bloomberg. Orders for equipment such as locomotives and medical-imaging machines outpaced growth in related service contracts, which have higher profit margins.

Revenue dropped 8 percent, including the NBC Universal stake sale, to $38 billion, lower than the average analyst estimate of $40 billion. Sales were trimmed by about $1 billion because the fourth quarter had six fewer operating days than the year-earlier period, GE said.

“The nature of the report today, a little lighter on the revenues, but slightly better on earnings, highlights the need for GE to really work hard on driving their top line,” Nick Heymann, a William Blair & Co. analyst, said in a Bloomberg Television interview. Sales were up 4 percent excluding NBC.

About 21 percent of GE’s sales came from Europe in 2010, the most recent year for which data were available. The company is paring operations in the region, in areas like health care and lighting, in response.

GE was unchanged at $19.15 at 4:15 p.m. in New York trading. The shares declined on eight of the 10 previous earnings days.

Industrial Drivers

“The most important thing for the stock is for the industrial businesses to drive growth and we’re just not seeing great results there yet,” Mark Demos, who helps oversee $18 billion at Fifth Third Asset Management in Minneapolis, said in a telephone interview. “They really haven’t had that quarter where they come out and have a clean beat by a lot.”

Operating profit margins fell to 16.2 percent in the fourth quarter from 17.6 percent a year earlier, according to a presentation on GE’s website. The margin improved from the 13.7 in the third quarter, and Immelt repeated a goal of expanding it 50 basis points in 2012.

Profit from continuing operations increased less than 1 percent to $3.93 billion, from $3.9 billion, or 36 cents, a year earlier, Fairfield, Connecticut-based GE said in a statement.

Including items such as pension costs and an increase in reserves related to the Japanese consumer finance unit sold in 2008, net income fell 18 percent to $3.73 billion, or 35 cents a share, from $4.54 billion, or 42 cents.

GE Capital revenue dropped 9 percent to $10.7 billion, while profit climbed 58 percent to $1.62 billion. Chief Executive Officer Jeffrey Immelt is simplifying the unit while seeking to lessen the portion of the company’s total earnings that comes from the finance division.

GE Capital

The company announced a new goal for GE Capital’s ending net investment, a measure of a finance company’s assets, to a range of $425 billion to $440 billion. The division is about a year ahead of its target in shrinking assets, a plan instituted in the wake of the global financial crisis.

GE plans to consolidate the GE Capital Corp. and GE Capital Services Inc. entities to simplify reporting, Chief Financial Officer Keith Sherin said on an earnings call. The move wasn’t spurred by the Federal Reserve’s taking over as regulator.

GE Capital Services used to contain the company’s now disposed-of insurance divisions and, in the 1990s, the long-sold off Kidder Peabody division. With those gone, there is little benefit to having two separate entities, he said.

Earnings in energy infrastructure, the largest industrial division, were little changed with profit of $2.2 billion. Energy sales rose 19 percent to $13 billion, helped by acquisitions and shipments of equipment.

Pricing Pressure

“GE said they are seeing some signs of stabilization in pricing discussions on commitments, but it takes six to 18 months for commitments to become orders,” Vertical Research Partners co-founder Jeffrey Sprague said. He estimated it will take the same time period to turn orders into revenue.

GE and competitors Siemens AG and Alstom SA “all have excess capacity and are likely to remain aggressive on price,” Sprague said. “As a result, GE continues to fill up its backlog with poorly priced units” and improvement in that may take all of this year and next, he said.

At year-end, GE had $85 billion in cash on its balance sheet. Immelt and Sherin said on the call that priorities for that include shareholder dividends, reducing outstanding stock through buybacks, and making smaller acquisitions.

“Really, we don’t need acquisitions,” Immelt said. “We have got a pretty full pipeline of new products, and so I think the emphasis on dividend, reducing the float over time, those take a very high priority.”

Order Backlog

The company’s order backlog rose to $200 billion from a record $191 billion at the end of the third quarter. Total infrastructure orders climbed 15 percent in the quarter to $28.6 billion, with equipment up 23 percent and services up 7 percent.

The company saw a 25 percent increase in industrial “growth market” revenue, driven by emerging economies. Expansion in organic industrial orders, or those from businesses owned more than a year, slowed to 5 percent in the fourth quarter from 8 percent in the three months through September.

Cash generated from industrial operating activities in 2011 was $12.1 billion, above the high-end of the December forecast range of $11 billion to $12 billion.

“Job One for the GE team in 2012 is to grow the industrial earnings more than 10 percent,” Immelt said on the call. “And I like the backlog we have to do it with.”

Profit at aviation, the world’s biggest jet-engine maker, rose 4 percent to $850 million on sales of $4.92 billion. The division is beginning to ship record orders spurred by newer models including the GEnx on Boeing Co.’s Dreamliner and the Leap on Boeing’s 737 MAX and Airbus SAS A320neo.

‘Peeling Back’

Health-care profit declined 5 percent to $953 million on a sales increase of 1 percent as the division grappled with declines in Europe. Competitors Siemens and Royal Philips Electronics NV, both noted slower demand in imaging equipment in the region earlier this month.

Home and Business Solutions earnings, including lighting and appliances, declined 41 percent as revenue fell 4 percent.

“GE brought mediocre earnings to life this quarter, with revenues missing our expectations by about $1.5 billion,” Joel Levington, managing director of corporate credit for Brookfield Investment Management, said in an e-mail.

“Peeling back the onion, energy revenues came in light; health care, much like peers Siemens and Philips, were soft, but aviation was quite good,” he said. “All told, the quarter is largely benign to credit quality, but can’t see this print exciting stock investors.”

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