General Electric sees fruits of diversification

Oil and gas weakness is offset by the rest of the portfolio in the fourth quarter.

Barbara Noverini, CFA 26 January, 2015 | 6:00PM

 General Electric's GE industrial portfolio delivered a solid quarter of growth as ongoing momentum in several U.S. end markets more than offset weakness in the energy sector. Industrial revenue grew organically by 9% year over year to $32.2 billion (all figures are in U.S. dollars) in the fourth quarter, reflecting robust equipment sales in power and water, shipment and services growth in transportation, and ongoing improvement in health care. Strength in these segments offset weakness in oil and gas, which managed to hold sales flat on an organic basis amid challenging industry conditions. The quarter's results closed 2014 with about $108 billion of industrial revenue, reflecting a 7% year-over-year organic growth rate.

The industrial segment operating margin improved 50 basis points year over year to 18.8% in the quarter, as cost-reduction efforts intensified companywide. Oil and gas in particular stepped up efforts to rationalize the cost base as segment order growth slowed, anticipating the need to operate a leaner footprint in the near term. For 2014, industrial operating margins expanded 50 basis points to 16.2%, as the business mix skewed toward lower-margin equipment sales; however, analytics expanded service margins an impressive 220 basis points to 32%, underscoring the attractiveness of expanding services as a percentage of GE's revenue over time.

In our opinion, GE's resilience in the face of uncertain global macroeconomic conditions supports our belief that despite increased concentration on industrials, the portfolio's end markets and geographic exposure are well diversified. Persistent weakness in oil prices will probably continue to affect order growth and sales in the oil and gas segment; however, we've built near-term weakness into our discounted cash flow model and remain optimistic that demand in power and water, aviation, transportation, and health care will continue to produce solid results for GE in 2015. As such, we reiterate our fair value estimate of $30 per share.

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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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