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GE Rises to Five-Year High as Industrial Margin Widens

General Electric Co. Engine
Aviation sales climbed 12 percent. Photographer: Susana Gonzalez/Bloomberg

General Electric Co., buoyed by demand for jet engines and locomotives, assured investors that its industrial business is poised to meet a goal for profit-margin growth and saw its shares climb to a five-year high.

Third-quarter industrial margins widened 1.2 percentage points from a year earlier, setting up the company to hit its full-year target of a 0.7 point gain, GE said today. Adjusted profit from continuing operations of 36 cents a share beat the 35-cent average of 14 analyst estimates compiled by Bloomberg.

Investors are tracking the margins because Chief Executive Officer Jeffrey Immelt seeks to boost manufacturing earnings at Fairfield, Connecticut-based GE while shrinking the finance unit, after access to capital vanished during the 2008 financial crisis. GE rose 3.5 percent to $25.55 in New York, its highest closing price since Sept. 25, 2008.

“It was encouraging to see the strength in their orders,” Nick Heymann, a New York-based analyst at William Blair & Co., said in an interview. He rates GE as market perform. “The performance on margins was good and takes a little bit of pressure off the fourth quarter to reach the levels they’ve talked about.”

Record Backlog

Orders climbed 19 percent to $25.7 billion, including gains of 17 percent in China, 18 percent in sub-Saharan Africa and 51 percent in Russia and other parts of the former Soviet Union. The company said its backlog of equipment and services at the end of the quarter was a record $229 billion, $6 billion more than three months earlier.

“We’re benefiting from being focused on these big economic and demographic changes that are going on across the world that we sell directly into,” Chief Financial Officer Jeff Bornstein said in a telephone interview. “We’re in the big infrastructure businesses that are exactly what these growth economies are growing out.”

Adjusted profit from continuing operations fell 3 percent last quarter to $3.7 billion from $3.8 billion, or 36 cents, a year earlier, GE said in a statement. Sales fell 1 percent to $35.7 billion, trailing the $36 billion average estimate in a Bloomberg survey of 11 analysts.

Beat Expectations

Analysts at Morgan Stanley, Credit Suisse Group AG and Sanford C. Bernstein & Co. said in notes today that GE’s quarterly gain in industrial margins exceeded their estimates. The industrial margin for the third quarter was 15.4 percent, GE executives said on a conference call with analysts. Margins have expanded 0.4 percentage point this year compared with the first nine months of 2012.

“We’re ready for a really strong fourth quarter,” Immelt said on the call. Profit-margin expansion will be broad-based at the industrial units in the year’s final three months, he said.

Revenue from industrial operations climbed 3 percent, led by a 12 percent advance at the aviation unit and an 18 percent gain at the oil and gas division. GE is the world’s largest maker of jet engines and diesel locomotives.

GE Capital, the finance arm, reported sales of $10.7 billion, 5 percent less than a year earlier. Immelt is studying a possible initial public offering for the unit’s consumer lending business, and he promised investors that GE would provide updates during a Nov. 15 presentation.

Including pension costs and discontinued operations, GE’s net income fell 9 percent to $3.19 billion, or 31 cents a share, from $3.49 billion, or 33 cents, a year earlier.

Costs to settle contracts with Avio SpA’s aviation business, which GE acquired for $4.3 billion, reduced earnings per share by 2 cents during the quarter, the company said. More than 50 percent of Avio’s aviation revenue came from GE before the acquisition, according to a statement last month.

Download: Earnings

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