GE shows great potential despite earnings dip
Strong growth in 2012 will be driven by its infrastructure businesses and a good backlog of orders.
Revenue growth was lower than we expected partly because of project delays, which have helped GE build an exceptional order backlog.
GE competes with other industrial conglomerates like United Technologies Corporation (UTX), 3M (MMM) and Johnson and Johnson (JNJ).
GE is on track with its focus on core infrastructure business and reducing its dependence on finance. Its 2011 results show that over three-fourths of the company's profits came from industrial activities compared to the years before the sub-prime crisis when infrastructure contributed to less than half of GE's earnings.
GE bagged infrastructure orders worth $28.6 billion in the fourth quarter, up 15% over the prior year period. This helped it close the year with a record order backlog of $200 billion, up from $175 billion a year earlier. Although GE's industrial revenues fell by 6%, we think this was due to project delays that were recorded in the backlog.
The growth in the industrial segment was mainly driven by the emerging markets orders that increased by 26%. Equipment orders were up 23% while the high-margin service orders were up by 7%. India and ASEAN are the leading markets that drove the growth, while energy and aviation are the segments that saw the most healthy earnings. Weakness in healthcare margins was compounded by the eurozone crisis which caused a decline in healthcare sales by as much as 13% in the region. However, energy margins remained buoyant and the company had an overall operating margin of 16.2%, while this was lower than the 17.6% recorded a year earlier.
GE is poised for strong growth in 2012, which will be driven by its infrastructure businesses and a good backlog of orders. Operating revenues will improve, although Europe might prove a drag and the company is already preparing for a recession in this region.
After being burned in the sub-prime crisis, GE Capital is making all the right noises and following up with substantial action. It's disposing bad assets and has a new target of $425 to $440 billion to trim its balance sheets. While GE Capital's revenues were down by 9% over a year ago, its operating profit increased by 58%, in-line with GE's efforts to reduce size and improve profitability. We feel this is the right approach and GE Capital looks set for double-digit growth in 2012.
GE has invested massively in Research & Development in the past year, the benefits of which it will reap in 2012, when it plans to introduce over 800 new products. GE's R&D expenses in 2011 were 16% higher than in 2010 and it launched new technological products that threaten to be disruptive when they come to market.
It has developed a Leap-X engine, which helps airlines operate at a lower cost and have fewer emissions. This engine already bagged orders worth $4 billion during the Dubai Air Show and looks set to be a major seller to the low-cost airlines of developing countries. GE has also come up with a new mobile and robotic interventional X-Ray and a new design of a gas turbine, which uses less fuel. The response to all these and other new products that GE is set to launch will determine the extent of growth the company is able to materialize in 2012.
We currently have a Trefis price estimate of $20 for General Electric's Stock, around 5% above the current market price. We are in the process of updating our estimates post Q4 earnings. See our full analysis of the General Electric stock here.
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The company, headed for an IPO later this year, is worth as much as 10 Tesla Motors combined, says Bernstein's Carlos Kirjner.
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