GE offers high-quality earnings in a slow-growth world

Its latest results show resilience in the face of macroeconomic volatility.

Barbara Noverini, CFA 2 August, 2016 | 5:00PM

 General Electric's (GE) second-quarter results held no surprises, and we're maintaining our US$30 fair value estimate and wide-moat rating. The industrial behemoth continues to face a challenging global backdrop, particularly in resource-driven industries, which once again translated to steep declines in sales activity in its oil and gas and transportation segments. As a result, revenue for GE's industrial segment declined nearly 1% year-over-year on an organic basis, despite otherwise healthy sales in power, aviation and healthcare.

Despite sluggish organic revenue growth, industrial operating margins (excluding the contributions of Alstom Power and Grid, which GE acquired at the end of 2015) managed to remain flat year over year at 14.2%, reflecting ongoing progress in GE's cost-cutting initiatives as well as some benefits from pricing outpacing inflation. These factors helped improve gross margins by 110 basis points since the prior period, which offset some of the negative impact of product mix in the quarter. As GE continues to work excess costs out of its legacy industrial businesses as well as newly acquired Alstom, we expect stronger operating leverage as volume improves across the portfolio.

Although organic revenue growth has trended slightly negative through the first half of 2016, the healthy but back-half-loaded backlog in power and aviation, combined with growing momentum in healthcare, still makes it possible for GE to reach its 2% to 4% organic industrial revenue growth target for 2016. Even if GE misses this target because of ongoing volatility in the global macroeconomic environment, we still believe that its balanced portfolio is positioned quite well for the long run. In our view, the ongoing integration of Alstom, a growing digital business and increasing focus on aftermarket services offer GE shareholders a long runway for high-quality industrial earnings in a slow-growth industrial world.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
General Electric Co7.05 USD4.29

About Author

Barbara Noverini, CFA

Barbara Noverini, CFA  Barbara Noverini is a senior equity analyst for Morningstar.

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