General Electric Co.’s transformation into a more simple industrial company seems to be helping its bottom line.
The top line, though, is lagging slightly.
GE’s net income rose 49 percent in the third quarter to $3.49 billion, or 33 cents per share. On an adjusted basis, GE earned 36 cents per share, in line with analysts’ expectations and up 13 percent from a year earlier.
Revenue rose $1 billion, or 3 percent, to $36.35 billion. But analysts were looking for revenue of $36.95 billion and GE shares fell 2.8 percent in afternoon trading.
GE, based in Fairfield, Conn., has returned to its roots an industrial company. It manufactures such products as jet engines and refrigerators and provides equipment and services to a growing roster of energy companies.
Revenue from GE’s industrial division is now more than double that of its financial businesses. During the financial crisis, investors worried that its enormous banking arm, GE Capital, would fail. GE said today its efforts to reduce assets in GE Capital, a move applauded by investors, is ahead of schedule.
As a result, GE lowered its revenue forecast. GE Capital’s revenue will fall 10 percent this year, instead of 5 percent. Revenue for all of GE is now expected to rise 3 percent for the year — to $151 billion — instead of 5 percent.
Push in energy sector
The energy sector has been a big part of GE’s industrial push. GE has spent $11 billion buying companies such as those that help oil and gas companies find and produce fossil fuels, and manufacturers that make engines and turbines to burn those fuels.
It said today that its energy investments are performing well and will generate strong growth in the fourth quarter and next year. Energy infrastructure profits rose 13 percent in the third quarter.
These companies are taking advantage of a boom in drilling for oil and natural gas in North America and elsewhere. GE is helping drillers produce and deliver oil from offshore deepwater formations and from onshore shale formations. It’s also seeing strong orders for equipment needed to liquefy natural gas to transport it around the world. And GE is rolling out new turbines of various sizes to help utilities generate electricity efficiently as they rely more on natural gas.
“You’ve got to feel great about oil and gas,” said Keith Sherin, GE’s chief financial officer.
Revenue from the company’s industrial divisions rose 8 percent in the third quarter and is up 10 percent so far this year.
Nicholas Heymann, an analyst at William Blair & Company, is encouraged that most of GE’s divisions are showing strong growth even in a weak global economy. He called it GE’s “best quarter in four or five years.”
One soft spot is GE’s wind turbine business. Orders for new equipment and services fell 5 percent from last year, mainly because wind turbine orders have fallen dramatically. That’s because a key U.S. federal subsidy for wind power is scheduled to expire at the end of the year.
CEO Jeff Immelt said today that GE is assuming “no market” in the U.S. for wind turbines next year without the subsidy. He expects wind revenue to fall 40 percent next year and cost the company 3 cents per share in earnings.
Excluding the drop in wind turbine orders, the company’s industrial orders were up 4 percent.
GE’s size and global scope gives it a unique perspective on economic growth around the world. Today, Immelt said the U.S. economic recovery is slow, and being held back by political and fiscal uncertainty. The European economy continues to struggle. The CEO described growth in Asia and other resource-rich regions as “slower but stable.”
Still, GE predicts that orders will grow by at least 10 percent in 7 of 9 geographic areas.
Immelt said China, Russia, Latin America and the Middle East will have “decent” opportunities for the rest of this year and next year.
“Europe is going to be a grind,” he said.
Immelt sees pockets of weakness and strength in the global picture for next year. The one major variable, he said, is the so-called fiscal cliff looming in the U.S. — the automatic tax hikes and spending cuts that will kick in at the beginning of next year unless Congress can agree on a new budget plan. He expects the standoff to get resolved “somehow.”
The relatively weak global economy is forcing GE to cut back, though, to protect profits. The company said it is on track to cut $2.8 billion this year as part of its “simplification” efforts.
This is helping profit margins. GE’s operating profit margin grew to 14.4 percent from 13.7 percent in the third quarter.
GE earned 22 cents in the year-earlier quarter. During that period the company repaid $3 billion to Warren Buffett’s Berskshire Hathaway for its investment in GE during the depths of the financial crisis.