Is The Market Betting on General Electric? GE Earnings Analysis

Founded in 1878 by none other than Thomas A. Edison, General Electric Company (NYSE:GE) is still going strong. GE stock has gained over 21% year-to-date and over 6% in the last month. The company operates through eight segments: Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions and GE Capital. The company discussed its Q3 2013 results last Friday. Our GE earnings analysis is based on these preliminary financial results for the quarter ended 2013-09-30. We have also just published Questions on Long-Term Strategy? Honeywell Earnings Analysis; Honeywell is another Industrial Conglomerate and a peer used in this  analysis.

General Electric Company (NYSE:GE)

GE Earnings Analysis

This analysis is peer relative (see the end of this post for the peer list) and is based on GE’s performance over the last twelve months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2013-09-30 2013-06-30 2013-03-31 2012-12-31 2012-09-30
Revenues 35,725.0 34,967.0 33,428.0 38,501.0 35,523.0
Revenue Growth % 2.2 4.6 (13.2) 8.4 3.7
Net Income 3,273.0 3,255.0 3,636.0 4,316.0 3,454.0
Net Income Growth % 0.6 (10.5) (15.8) 25.0 (5.6)
Net Margin % 9.2 9.3 10.9 11.2 9.7
ROE % (Annualized) 10.7 10.6 11.8 14.1 11.4
ROA % (Annualized) 2.0 2.0 2.1 2.4 2.0

Margin Driven Operating Model

General Electric Company trades at a lower Price/Book multiple (2.1) than its peer average (3.3). The market expects GE to grow earnings about as fast as the average of its chosen peers (PE of 18.5 compared to average of 18.7) but not to expect much improvement in its below peer average rates of return (ROE of 11.8% compared to the average ROE of 14.9%).

The company’s relatively high profit margins (currently 10.2% vs. peer average of 8.3%) are burdened by asset inefficiency with asset turns of 0.2x compared to the peer average of 0.7x. Overall, this suggests amargin driven operating model relative to its peers. GE’s net margin is its highest relative to the last five years and compares to a low of 7.2% in 2009.

Long-Term Strategic Bet

The market gives the stock a PE ratio of 18.5 which is above average even though GE’s revenues growth has been below the peer average in the last few years (-2.4% vs. 3.6% for the past three years). It seems as if the market sees the company as a long-term strategic bet.

GE’s annualized rate of change in capital of -5.9% over the past three years is less than its peer average of 7.1%. This below average investment level has also generated a less than average return on capital (2.6% averaged over the same three years). This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Understatement of Net Income?

GE has reported relatively strong net income margin for the last twelve months (10.2% vs. average of 8.3%). This margin performance combined with relatively high accruals (10.5% vs. average of 4.0%) suggests possible conservative accounting and an understatement of its reported net income.

GE’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer average — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts for GE Earnings Analysis

GE Earnings Analysis: Quarterly and Annual Revenues Trend for General Electric

GE Earnings Analysis: Quarterly and Annual Net Margin Trend for General ElectricGE Earnings Analysis: Quarterly and Annual Accruals Trend for General Electric

Peers used for GE Earnings Analysis

GE Earnings Analysis uses the following peer-set: Siemens AG (ADR) (NYSE:SI), United Technologies Corporation (NYSE:UTX), 3M Co (NYSE:MMM), Honeywell International Inc. (NYSE:HON), Medtronic, Inc. (NYSE:MDT), Danaher Corporation (NYSE:DHR), Mitsubishi Corporation (USA) (OTCMKTS:MSBHY), Koninklijke Philips NV (ADR) (NYSE:PHG) and Hitachi, Ltd. (ADR) (OTCMKTS:HTHIY).