Gee! A Look at GE

07/30/2004 12:00 am EST


Dan Kurz

Editor, DK Equities

Until recently, research from Dan Kurz was available only to institutions. Now, his 19 years of buy-side experience is available to individuals in his DK Equities Newsletter. Kurz keeps his focus narrow, with in-depth coverage of a small universe of top tier firms. Here he looks at GE.

"We have confirmed our buy recommendation on General Electric (GE NYSE). With $134 billion in revenue, GE is a leading diversified services company as well as an industrial and consumer products giant. GE operates in over 100 countries. International revenue accounted for 45.6% of consolidated results. Blue-Chip GE boasts sturdy earnings and robust free cash flow generation; excellent historical investment returns; standard-setting management practices; a highly adaptive corporate culture; and leadership in globalization, statistical quality control, integrated product services, and cost reduction efforts. Here are some highlights from its latest quarter:

  • Second quarter revenues, boosted by acquisitions, rose 11% to $37 billion. Currency had a nominally negative (-2%) impact on results.

  • Second quarter earnings increased 3.4% to $3.92 billion, yielding flat earnings per share of 38 cents per share.

  • Nine of 11 businesses, led by the equipment & other services, healthcare, commercial finance, and transportation segments, tallied double-digit operating income growth.

  • The healthcare segment’s operating income rose 32.7% or $144m despite deal-related costs as orders grew by 42%. Separately, Chinese-based revenue grew 20%.

  • At the commercial finance, earnings grew 16.7% or $143m, the largest-ever aircraft engine order in China was booked.

  • NBC Universal completed the merger with Vivendi, won key viewer ratings, achieved the highest upfront ad sales, and raised key Latin viewer ratings (Telemundo & Bravo units).

  • China is expected to account for $1 billion in GE OEM turbine revenues this year; no slowdown in energy investment foreseen. GE’s overall energy segment is set to bottom out in the fourth quarter of 2004.

  • GE’s industrial capacity utilization improved six points year-over-year to 83%.

  • Pricing erosion is moderating with selective pools of pricing power appearing.

  • GE’s balance sheet has been shored up and the firm AAA rating was confirmed.

"As for the upcoming outlook, GE notched up 2004 fiscal year earnings per share guidance by $.05 (from $1.50-$1.60 to $1.55-$1.60) on the back of stronger revenue growth. As a result, a 6%-11% second half earnings increase is projected. All-in-all, faster growing industrial sales and rising utilization rates are underpinning OEM margins while pronounced growth in GE’s installed base is driving robust increases in higher-margin service revenues. Combined, this is increasingly offsetting earnings drag from the energy and insurance units, unfavorable pension income comparisons, and ‘deal dilution,’ facilitating a return to more robust earnings expansion. Fiscal 2005 earnings per share growth is now expected at 10%-15%.

"The risks we see are a sustained lack of pricing power, weaker US economic growth, and demand-sapping high energy prices. Overall, GE’s large-company business model featuring diversity, recession resistant earnings, stout free cash flow generation, and consistent cost-reduction/productivity enhancement initiatives make GE shares a core holding for long term-oriented accounts. GE avoided the serious earnings compression suffered by most of its peers during the early ’00 years and is tilting its portfolio materially towards more rapidly growing healthcare technology and services markets even as it targets robust developing-world OEM demand, setting the stage for a return to low double-digit earnings growth. Our BUY rating is confirmed."

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