Breakingviews - GE’s clean sheet reveals real turnaround challenge

The logo of U.S. conglomerate General Electric is pictured at the company's site in Belfort, April 27, 2014. REUTERS/Vincent Kessler

NEW YORK (Reuters Breakingviews) - A quarterly earnings report without big writedowns represents a victory of sorts for General Electric boss John Flannery. Sure, the U.S. conglomerate’s earnings fell by nearly one-third year-on-year in the three months ended June 30 – but at least the nature of the challenge is now clear.

GE slashed its cost base by $1.1 billion in the first half, putting Flannery more than halfway to his 2018 target of $2 billion. The group’s healthcare division boosted revenue by 6 percent in the second quarter and operating profit by twice that rate. The unit’s spinoff, due to take place by the end of next year, should help GE halve the level of debt attached to its industrial businesses.

The real worry remains GE’s power division, bulked up under Jeff Immelt, Flannery’s predecessor. Orders fell by 26 percent year-on-year in the latest period, and operating profit more than halved. Demand for its gas-powered electricity turbines is weak, and will remain so. Meanwhile, GE’s renewables division isn’t fully benefiting from the industry’s shift. It focuses on wind power but not solar, and fierce competition drove double-digit declines in orders and revenue in the quarter.

These are at least things investors can see coming. The previous two quarters included $8 billion of charges for exposure to long-term-care insurance losses and mortgage litigation at its GE Capital unit. There’s none of that this time, though the financing arm remains a black box and will need a $3 billion capital injection next year.

That leaves aviation – GE’s best-performing bit. Orders jumped 29 percent in the quarter, and look set for continued strong growth after notching $22 billion in commitments at Britain’s Farnborough air show last week. The division generated half of the group’s operating profit, and more than 80 percent of what will be the new GE. Like an aircraft, GE really should have more than one engine, but this is at least enough to stay aloft.


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