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U.S. industrial giant General Electric (NYSE: GE) is widely viewed as an economic bellwether. This designation makes sense, as the company is a massive conglomerate that makes everything from locomotives and turbines to household appliances. Its products and services extend across virtually all industries, including transportation, energy, health care and consumer durables.
When GE trembles, the entire world feels it.
The company released quarterly earnings Friday morning. While GE earnings beat estimates, revenue fell short of forecasts, although the company is still growing in many areas once foreign exchange effects are accounted for.
Still, GE stock fell 1.2% on Friday, a concerning sign on a day in which the Dow Jones Industrial Average gained more than 200 points. Investors are clearly still worried about the potential for a global economic slowdown and possible recession, but thus far, GE is navigating the current climate well.
Fourth Quarter in Review
GE generated fourth-quarter adjusted revenue of $33.8 billion. That missed analyst expectations, which called for $35.9 billion.
Not surprisingly, the reason why GE failed to meet projected revenue estimates was because of the continued deterioration in the oil and gas industries. Revenue in GE’s oil and gas segment fell 16% last quarter, year-over-year.
As a major industrial company, GE is significantly exposed to the energy sector. Due to the collapse in commodity prices, oil and gas companies have deeply cut into their capital expenditures. This translates into lost revenue for industrial firms like GE.
In recent years, GE has made further penetration into the energy markets a strategic priority. While this likely seemed to be a great idea when oil was $100 a barrel, in hindsight it was the wrong move. Last year, GE generated $24 billion in combined revenue in its oil and gas and energy management businesses. These represented approximately 22% of GE’s 2015 total revenue.
However, GE beat on earnings per share. Adjusted earnings of $0.52 per share exceeded Wall Street projections of $0.49 per share. The reason for the earnings beat was cost cutting. Profit margin in the core industrial business expanded by 80 basis points last quarter, to 18.3% excluding restructuring.
Still, it’s not all bad news. GE’s industrial businesses grew organic profit – a measure of earnings that excludes foreign exchange effects – by 3% in the fourth quarter and 10% in 2015. The global economy is still growing, albeit at a very modest pace, indicated by GE’s order backlog. Organic industrial orders rose 1% last quarter.
Meanwhile, GE reiterated its 2016 forecast for operating earnings of $1.45-$1.55 per share. Organic revenue is expected to grow as much as 4%. While the strengthening U.S. dollar is having a deeply negative impact on large multinational companies such as GE, it’s at least a good sign that GE is still expected to grow revenue in organic terms this year.
GE: Navigating a Tough Climate
GE is a company in transition. It made huge headlines last year when it announced plans to sell virtually the entirety of its finance arm, known as GE Capital. The goal of this move is to generate 90% of its earnings from its traditional industrial businesses. That is a worthy pursuit for GE, as GE Capital was highly volatile and by itself nearly brought GE to the brink of total collapse during the 2008 financial crisis.
Still, it adds another layer of uncertainty, which investors loathe right now. That is why GE stock has not been able to break out of the $25-$28 range in the past year, despite steady growth from its core operations.
GE deserves credit for managing itself well through a terrible environment for industrial companies. The stock still offers a solid 3.3% dividend, which at least pays investors well to wait for the turnaround.
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