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General Electric Company (GE) Earnings Bode Well for the Future

The last time General Electric Company (NYSE:GE) reported earnings, the news spooked investors enough to spark a 4% sell-off in GE stock. But investors had a different reaction entirely to GE earnings on Friday: They bid the stock up 4% (and even a bit more). So the news must have been good, right?

Well, yes and no.

General Electric Company (NYSE:GE)

Viewed in isolation, General Electric Company (NYSE:GE) earnings Friday were no great shakes. Industrial cash flow from operating activities was $1.55 billion for the quarter, down 10% from last year, while total cash from operations was off by 46%. Q2 profits from continuing operations came in at $0.31 per diluted share on $35.1 billion in revenues. Those numbers were down 9%, and 4%, respectively, from last year’s second quarter.

Today versus tomorrow
On the other hand, General Electric Company (NYSE:GE) earnings did beat analyst estimates (by a penny). More importantly to investors, the company is showing signs of improved health that bode well for the future.

“Industrial segment profit growth in six of seven businesses” was up year over year, according to General Electric Company (NYSE:GE) CEO Jeff Immelt, with industrial profit margins up 50 basis points. Meanwhile, structural costs are down. And perhaps most importantly, the “business environment … was slightly improved versus the first quarter,” with orders growing 20% in the U.S. alone, and the emerging market “resilient.”

According to Immelt, “GE’s backlog of equipment and services at the end of the quarter was its highest ever.” And since orders today are what generate revenues tomorrow, this has General Electric Company (NYSE:GE)’s CEO predicting further growth in both sales, and profit margins, in the second half of the year. Combined, those two factors should yield improved GAAP profits at the company.

What does it mean to you?
If you are a shareholder, General Electric Company (NYSE:GE)’s earnings report contains quite a few good tidings. Already, GE is showing its strongest revenue growth (9% in Q2) in its two most profitable business segments: oil and gas (14% operating profit margin), and aviation (16% margin). New engines to power The Boeing Company (NYSE:BA) and Airbus aircraft are (literally) flying off the shelves, as airlines such as AirAsia and United Continental Holdings Inc (NYSE:UAL), and airplane lessors including CIT Group Inc. (NYSE:CIT) pay up to outfit their new planes.

Orders such as these have GE showing $223 billion in backlogged orders — or about four years and eight months of work to be done. These are future revenues that are basically in the bag — and at higher profit margins.

In short, it’s not the earnings GE reported last week that matter so much, as the earnings they’re set to report in the future.

The article GE Earnings Bode Well for the Future originally appeared on is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Electric.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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