GE Tops Estimates: Sign of Stronger Economy or Cost-Cutting?

Since General Electric (NYSE:GE) has diversified its business on a massive scale — it is a conglomerate with a major manufacturing footprint in the energy, aviation, finance, and healthcare industries — its financial results often reflect the health of the economy, especially the U.S. economy. As 2013 winded down, several jobs reports showed strengthening employment gains, consumer spending remained resilient, and the manufacturing sector grew briskly, and so Wall Street expected GE to report a strong quarter.

General Electric’s fourth-quarter results did manage to surpass both Wall Street’s top-line and bottom-line expectations; analysts surveyed by FactSet predicted the company’s earnings would jump 20 percent to 53 cents per shares from the 44 cents per share recorded in the year-ago quarter, while revenue would increase 12 percent to $40.27 from the $36.02 billion in sales booked in the fourth-quarter of 2012. Thanks to a strong increase in orders for industrial equipment — with demand for jet engines and electrical turbines growing — earnings rose 16 percent.

Adjust profit from continuing operations rose $5.42 billion, or 52 cents per share, and revenue inched up 3.1 percent to $40.0 billion, with industrial sales accounting for $28.8 billion of that total. In particular, higher sales in emerging markets, greater banking profit, and strong sales of jet engines and drilling equipment contributed to the strong results.

“GE ended the year with strong fourth-quarter earnings and margin growth in an improving but mixed environment,” Chief Executive Officer Jeffrey Immelt said in the earnings press release. “We saw good conditions in growth markets, strength in the U.S., and a mixed environment in Europe.” But investors — who bid shares of GE more than 37 percent higher in 2013 — did not respond positively to the company’s earnings release; the stock fell 1.10 percent in pre-market trading Friday morning, and continued to trade as much as 2.65 percent down in the first hour of trading. Revenue did slip slightly for the full year as GE continued its transformation from sprawling conglomerate to more focused industrial company. Plus, profits for the fourth-quarter were boosted by a 38 percent increase in profit at GE Capital, the finance unit the company is preparing to divest.

More to the point, that gain came as the American financial sector has begun to stabilize and was largely due to the sale of assets in Switzerland. Investors are looking to see is solid growth in the company’s numerous industrial businesses. Of course, GE’s fourth-quarter results were also helped by profit growth of 20 percent or more in its aviation, oil and gas, and appliance divisions. Yet, analysts are concerned that cost-cutting measures were even more responsible for the quarter’s gains, another fact that caused investors concern. “Cost cuts are how they really made the quarter here,” Solaris Asset Management’s Tim Ghriskey told Rueters. “But at some point, cost cuts are going to run out.”

But growth is expected to continue into the current year; the company reaffirmed its forecast for “double-digit” growth in industrial earnings in 2014. GE’s record instructional backlog of $244 billion, a 19 percent increase from a year ago, is the evidence that, “GE ended the year with great strength,” as Immelt professed in the earnings release, and that the company is “well-positioned to achieve our framework for 2014.” Much of the industrial giant’s earnings growth in coming quarter depends on more than the economic recovery; GE has to continue to prune its operations so that management can focus on its core industrial businesses, which saw an 11 percent increase in sales in the third-quarter and an 8 percent increase in the fourth-quarter. For the upcoming year, GE has set out a framework for strong industrial segment growth, the expansion of margins, lowered corporate expenses, and a reduced exposure to unpredictable financial businesses.

Since 2008, GE has shrunk the size of its banking business and other non-industrial businesses like NBCUniversal, and focused on strengthening its industrial operations, which manufacture and service complex equipment, products, and services that are sold to utility companies, hospitals, oil and gas producers, and jet manufacturers like Boeing (NYSE:BA). As part of the company’s efforts to focus on manufacturing, Immelt is preparing to spin off the GE Capital finance arm later this year.

For the full year, GE earned $14.1 billion on revenues of $146.0 billion. On a profit basis, that was an increase — earnings came in at $13.6 billion in 2012. However, full year revenue dropped modestly from the $146.7 billion reported in 2012.

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