GE profit margins fall short, shares slide

Fri Jan 17, 2014 1:26pm EST

General view of General Electric GEnx-747 jet engine before a test at the GE Aviation Peebles Test Operations Facility in Peebles, Ohio, November 15, 2013. REUTERS/Matt Sullivan

General view of General Electric GEnx-747 jet engine before a test at the GE Aviation Peebles Test Operations Facility in Peebles, Ohio, November 15, 2013.

Credit: Reuters/Matt Sullivan

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(Reuters) - General Electric Co (GE.N) posted disappointing 2013 profit margins on Friday, hurt by delayed wind turbine deliveries and poor energy management results, offsetting a 5 percent rise in quarterly earnings.

Strength from sales of oil pumps and jet engines helped the U.S. conglomerate match Wall Street expectations for fourth-quarter profit of 53 cents per share, excluding items.

But shares dipped 2.6 percent as it came up slightly short of its 2013 goal for expanding profit margins at its industrials businesses, which the company is increasingly focusing on as it reduces its exposure to the volatile financial sector.

"This was an important target they had been putting in front of investors for a long time," said Christian Mayes, an analyst at Edward Jones, who has a "hold" rating on GE.

"The transition is continuing to take time and GE is going to really have to hit these targets, and it's disappointing they couldn't quite get it done on the industrial target this year."

GE expanded its operating margin for its industrials businesses by 0.66 of a percentage point, below its full-year target of a 0.7 percentage point improvement.

GE's Chief Financial Officer Jeff Bornstein told Reuters in an interview the margin shortfall was "absolutely negligible, given the size of the company."

"Execution-wise, we like the momentum we have behind us and but for a couple of issues in the quarter, it really wouldn't have been much of a discussion," Bornstein said.

The diversified manufacturer said its quarterly net earnings rose to $4.2 billion, or 41 cents per share, from $4.01 billion, or 38 cents a share, a year earlier.

Its 53 cents per share quarterly profit, excluding items, was in line with the average expectation of analysts, according to Thomson Reuters I/B/E/S.

"They make a lot of big stuff, and when you sell a lot of big things it's easier for things to slip on a quarter-by-quarter basis and have a dramatic effect on margins," said Jack Degan, chief investment officer at Harbor Advisory Corp.

"On a year-over-year basis, their margins are moving in the right direction," said Degan, whose company owns GE shares.

The conglomerate said its cost cuts were ahead of plan for 2013, and it would seek to reduce costs by at least another $1 billion in 2014.

"Cost cuts are how they really made the quarter here," said Tim Ghriskey, chief investment officer of Solaris Asset Management, which owns GE shares. "But at some point, cost cuts are going to run out."

GE shares fell 2.6 percent in afternoon trading to $26.48, against a broadly flat market. The stock outperformed in 2013 when it rallied more than 30 percent.

OIL BOOST

GE, a bellwether for the economy because of its size and diversity, reported that six of its seven industrial segments grew earnings.

"We saw good conditions in growth markets, strength in the U.S., and a mixed environment in Europe," Chief Executive Officer Jeff Immelt said in a statement.

Revenue rose 3.1 percent to $40.38 billion, about $160 million ahead of analysts' targets.

Revenue at its oil and gas business - its fourth largest, but fastest growing segment in 2013 - jumped 17 percent, while revenue in aviation, its second-biggest segment, increased 13 percent.

Ghriskey said the revenue growth was "reflecting very much a GDP type of growth rate, and nothing above that."

Results in its largest segment, power and water, were hurt by an issue with the manufacture of blades for wind turbines.

The company did not ship 200 turbines as expected in the fourth quarter, and now expects to do so in early 2014.

The supply chain issue weighed on profits and margins in the fourth quarter.

"Wind has been one of the laggards for the portfolio for the last couple of years," Morningstar analyst Daniel Holland said.

Profit in its smaller energy management unit fell 28 percent, although the segment is a relatively small contributor to overall earnings.

GE's backlog of orders for everything from oil pumps to jet engines and turbines rose 16 percent to $244 billion, a record.

CFO Bornstein said the backlog gave the company confidence it would reach its goal of increasing revenue in 2014 by 4 percent to 7 percent for its industrial businesses, excluding acquisitions.

(Reporting by Lewis Krauskopf and Ernest Scheyder; Editing by Sophie Hares)

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