GE: What's Not To Like?
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In a technology move that could place wind energy on the same economic footing with traditional fossil fuels, General Electric (NYSE: GE), Virginia Polytechnic Institute & State University (Virginia Tech), and the National Renewable Energy Laboratory (NREL), will begin work on a project that could fundamentally change the way wind blades are designed, manufactured, and installed. Most of the cost of electricity from wind generation is tied up in the initial capital investments made in the wind turbines themselves and new advances in technology that reduce these costs could substantially reduce the overall cost of wind energy. According to GE, this new blade design could reduce blade costs 25% to 40%, making wind energy as economical as fossil fuels without the need for government subsidies. GE's research will center on the use of architectural fabrics, which would be wrapped around a metal spaceframe, resembling a fishbone and fabric would be tensioned around ribs which run the length of the blade and specially designed to meet the demands of wind blade operations. Conventional wind blades are constructed out of fiberglass, which is heavier and more labor and time-intensive to manufacture. It is estimated that achieving the national goal of 20% wind power in the U.S., wind blades would need to grow by 50% which is a figure that is almost impossible to achieve with the current state of technology. This move could help a significant future impact on the wind turbine business.
GE announced third-quarter operating earnings of $3.8 billion, or $0.36 per share, up 10% and 50% respectively from the same quarter of the previous year. Excluding the effects of the third-quarter 2011 preferred stock redemption, operating earnings per share rose by 13%. GAAP earnings from continuing operations came to $3.5 billion, or $0.33 per share (up 43%) on revenues of $36.3 billion for the quarter (up 3%) and up 6% excluding the effect of foreign exchange rates. Industrial segment revenues grew by 6%, with organic growth of 8% and the strength of GE's Industrial portfolio asserted itself. All Industrial segments showed positive earnings growth for the first time since the third quarter of 2005 while Energy Infrastructure, Transportation and Home & Business Solutions reported double-digit earnings growth. The company is on track to deliver double-digit earnings growth in 2012 for both Industrial and GE Capital segments.
Infrastructure orders were $21.5 billion; down 5% primarily driven by a decrease in orders for wind turbines though orders were up 4% if you exclude the effects of Wind and foreign currency translation. Year-to-date orders were up 4%, with four of the five Infrastructure businesses showing growth. Pricing on orders was up 0.1% in total for the quarter. GE Capital remains on course to become a smaller, better focused financial services business with better quality earnings. GE Capital earnings grew by 11% in the quarter and ENI was $425 billion at quarter end, ahead of plan. GE Capital (GECC) distributed a $2.4 billion dividend to the parent in the quarter, bringing the year-to-date total to $5.4 billion and its Tier 1 common ratio remains strong at 10.2%.
Operating earnings for the quarter were $3.8 billion, up 10% from the same quarter of the previous year and operating EPS was $0.36, up 13%, excluding effects of the third-quarter 2011 preferred stock redemption. GAAP earnings from continuing operations were $3.5 billion, up 5%, or $0.33 per share, up 43% from the same quarter of 2011.Including the effects of discontinued operations, third-quarter net earnings attributable to GE were $3.5 billion ($0.33 per share attributable to common shareowners) in 2012 compared with $3.2 billion ($0.22 per share) year on year. Cash generated from operations in the first three quarters of 2012 came to $10.7 billion, up 63% from $6.5 billion for the same period the previous year. Cash generated from GE Industrial operating activities in the first three quarters of 2012 totaled $5.2 billion, down 20% from the previous year.
The good news is that GE is extremely well diversified and showing solid growth in every one of its business segments. It is spending big money on future businesses that look promising and the latest move has been the formation of GE Mining, with the purpose which would provide power solutions, water management, and productivity solutions at mining sites. The basis of this new business segment has been the acquisition of two mining companies - Australian-based Industrea, and Virginia-based Fairchild International. This comes on the back of the $11 billion that the company spent in 2011 alone on acquisitions in the energy industry
Given the sheer breadth of GE's business activity, there is one company that competes in all its businesses so we would take a look at some other companies that compete in some of its businesses. Honeywell (NYSE: HON) trades at a forward price/earnings ratio of over 21 and, on average, analysts expect revenue, EBITDA, and EPS to grow by 2-year CAGRs of 4.0%, 42.0%, and 37.8% over the current and next fiscal years. The company currently offers an approximately 2.4% dividend yield, which is well covered by the company's free cash flow it is committed to continuous dividend growth. Siemens (NYSE: SI) announced very strong numbers for its fourth quarter and sales increased by 18% to around $5.5 billion. For the fiscal year 2012 as a whole the sales of the company increased by 16% to around $21.6 billion. The company also announced that it will cut well over $7 billion in costs by fiscal year 2014 and the stock currently trades at a price/earnings multiple of over 15. Koninklijke Phillips (NYSE: PHG) beat earnings forecasts for the third consecutive quarter, boosted by cost cuts and higher sales, as a drastic overhaul of the company is being implemented. The stock quotes at a price/earnings multiple of well over 40.
After its troubles with GE Capital post the financial crisis of 2008, GE is well poised for growth in every one of its business segments which is rare for a company of this size. There are great opportunities for both dividend yield and capital growth. GE has rightfully regained its position amongst the bluest of blue chips, and I have no hesitation in recommending it to investors.
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