UPDATE 4-GE industrial profit boost underscores strategy, shares up

Thu Apr 17, 2014 12:45pm EDT

(Adds CFO comments, updates share price)

By Lewis Krauskopf and Ernest Scheyder

April 17 (Reuters) - General Electric Co posted a 12 percent rise in overall industrial profits on Thursday, as strength in its businesses selling gas turbines, jet engines and oil industry equipment offset weakness in healthcare and transportation.

GE, which is increasingly focusing on its traditional manufacturing businesses over its finance unit, posted an 8 percent increase in industrial revenue, even as overall company revenue fell slightly short of Wall Street's target.

GE shares rose 2.4 percent to $26.74 in afternoon trading as profit also edged past analyst estimates.

"The big story is the organic revenue growth," said Tim Ghriskey, chief investment officer of Solaris Asset Management, which owns GE shares. "It really shows the return to an industrial emphasis is paying off, and where the company is focusing."

The results underscored GE Chief Executive Officer Jeff Immelt's strategy to focus the company even more on manufacturing of large industrial products as he reduces the company's dependence on its GE Capital finance unit. Immelt is also seeking to improve profit margins and slash administrative costs at the 307,000-employee company.

Still, GE said it plans to divest $4 billion worth of industrial businesses this year as the conglomerate focuses its portfolio on high-returning businesses. The company is already in the process of spinning off its North American retail finance business as it seeks to reduce the contribution from GE Capital to 30 percent of company profits by 2016, compared to about 45 percent in 2013.

"We are more active on the divestiture front this year," Immelt told analysts on a conference call.

GE also is targeting acquisitions in the $1 billion to $4 billion range, although it would consider spending more if the deal was "absolute strike zone," Chief Financial Officer Jeff Bornstein said in an interview, including targets that fit with its main businesses and offer significant cost savings.

Many conglomerates want to step up dealmaking but also must grapple with targets being expensive due to the rising stock market, a perspective that Bornstein echoed.

"Valuations are quite high and we will be very selective in what we do," Bornstein said.

Rival U.S. diversified manufacturer Honeywell International Inc also posted slightly better-than-expected profit on Thursday, helped by sales of its automobile turbochargers in the United States and China.

Honeywell shares were little changed on Thursday. But its shares this year have still outperformed those of GE, which through Wednesday had declined about 7 percent in 2014, worse than industrial rivals and the broader U.S. markets.

GE's first-quarter net earnings fell to $3 billion, or 30 cents per share, from $3.53 billion, or 34 cents per share, a year ago, when the company's results were boosted by its sale of NBCUniversal.

Excluding one-time items, operating earnings of 33 cents topped analysts' average estimate by a penny, according to Thomson Reuters I/B/E/S.

Revenue fell 2.1 percent to $34.18 billion. Analysts were looking for $34.36 billion.

Revenue in its two largest industrial segments, aviation and power and water, each rose 14 percent, while its oil and gas division posted a 27 percent increase.

As expected, GE's transportation segment that makes locomotives was weak due to a poor environment for the mining sector. But its healthcare unit, which makes an array of MRI and other scanning machines, saw revenue slip 2 percent where some analysts were expecting growth.

"Healthcare was pretty weak," said Perry Adams, a portfolio manager at Northwestern Bank.

With a "massive structural change" in the U.S. healthcare market caused in part by President Barack Obama's healthcare law, Bornstein said hospitals and other GE customers may have been more cautious about spending.

"I expect that softness to persist into the second quarter," Bornstein said, but he said the company expects healthcare to increase profits globally this year.

GE's profit margins for its industrials businesses, a closely watched measure, improved to 13.4 percent from 12.9 percent a year earlier.

That margin improvement was "actually a little shy of what I would have expected," said Jack DeGan, chief investment officer at Harbor Advisory Corp, which owns GE shares.

Still, DeGan said, "the thing that surprised me was that organic growth was 8 percent when they were targeting for the year, 4 to 7 percent. To do that in the environment that we're in, indicates that as a whole they operated well in the first quarter."

GE's backlog of orders for everything from oil pumps to jet engines and turbines stood at $245 billion. Infrastructure orders for the quarter were $23.7 billion, unchanged from a year ago, disappointing some analysts.

GE backed its previous major 2014 financial targets, including the expectation of industrial profits growing by at least 10 percent. (Reporting by Lewis Krauskopf and Ernest Scheyder; Editing by Franklin Paul, Chizu Nomiyama and Meredith Mazzilli)

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Comments (1)
bertanderson wrote:
But significantly down overall year over year down 15%. That is bad for a stock that has been running up and has a P/E of 18. It should have a P/E of now more than 12 or so. Therefore, it is at least 30% overvalued.

Apr 17, 2014 9:53am EDT  --  Report as abuse
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