General Electric Company (GE): The Three Reasons Why This Industrial Giant Is Outperforming

If you think that investing is simple, then just take a look at industrial giant General Electric Company (NYSE:GE)’s latest results. The industrial sector has been weaker this year, but General Electric Company (NYSE:GE) reported a surprisingly good set of results. Furthermore, rivals such as Switzerland’s ABB and Germany’s Siemens AG (ADR) (NYSE:SI), have subsequently given disappointing results and guidance. So what’s going on with GE? How has it managed to achieve such good results?

The three reasons why the results were good

General Electric Company (NYSE:GE) actually reported a 4% decline in revenues, and its earnings from continuing operations before taxes were down 11%. It may seem peculiar to describe such results as being “good,” but here are three reasons why the description fits.

First, the industrial side actually increased segment profits by 2%. The negative contribution came from the financial services side, where GE Capital’s segmental profits declined 9%. The decline at GE Capital was in line with the company’s strategy to reduce its portfolio size and focus instead on its core GE business. The days are long gone from when GE was regarded as a financial services company with an industrial division attached to it. In fact, the industrial division now generates double the income of the GE Capital.

Here is a chart (sourced from company accounts) of General Electric Company (NYSE:GE)’s segmental income in the quarter:

Five of the six industrial segments increased profits, so the underlying performance is better than it appears at first.

Orders are up

The second reason is that its industrial orders were better in the quarter. Overall orders were up 4%, with U.S. orders up a whopping 20%, and its European orders were up 2%, having been down 17% in the previous quarter. Indeed, industrial bellwether Alcoa Inc (NYSE:AA) highlighted similar dynamics in its latest conference call. Alcoa Inc (NYSE:AA) implied that North America was strengthening, Europe was weak-but-stabilizing, and its outlook for China remained the same. Meanwhile, General Electric Company (NYSE:GE) claimed on the conference call that its emerging-market performance “remained resilient.”

A breakdown of GE’s order growth in the quarter, with all data sourced from company accounts:

Power & water has been the problematic segment this year, particularly within Europe. Indeed, European power & water orders were down 40% in the quarter. Excluding Europe, power & water orders were actually up 6%.

Furthermore, General Electric Company (NYSE:GE) claimed that 70% of the segment’s shipments would occur in the second half of the year, which should lead to strong margin expansion in the second half. This is good news, because the segment is GE’s biggest industrial profit center.