General Electric (GE) posted solid third-quarter results Friday that showed strength in industrial orders and improvement at GE Capital. We remain on the sidelines with respect to owning GE’s shares, but we were encouraged by the quarterly performance.
The industrial giant’s revenues expanded 12%, excluding certain items, led by a 19% increase in industrial segment sales (international industrial sales jumped 25%). The firm noted that industrial organic revenue growth accelerated and was a very strong 8% and that its industrial backlog reached a record $191 billion (up from $189 billion at the end of the second quarter) thanks to a 16% jump in industrial orders (the fourth straight quarter of double-digit growth). GE said it received over $3 billion in new customer wins across its energy business–with revenue in that segment expanding 30% in the quarter–and pointed to aerospace (sales of which jumped 10% during the period) and China (orders surged 65%) as sources of strength. Transportation was also a bright spot, with sales up 48% and operating profit nearly doubling. We view these data points as critical to our thesis that the US economy is not headed for recession anytime soon (we continue to be overweight aerospace in the portfolio of our Best Ideas Newsletter).
GE’s operating earnings expanded 11% (excluding the impact of the redemption of preferred stock held by Buffett’s Berkshire Hathaway), while net earnings per share (including discontinued operations) jumped 22%. The firm mentioned that this was the sixth consecutive quarter of double-digit earnings growth. GE Capital was a key driver in the quarter, with financial segment earnings at $1.5 billion (up 79%). We think GE Capital has improved significantly since the depths of the Great Recession, and we’re not too worried about the segment’s capital position—GECC/GECS Tier 1 Common Ratios were 11%/9.6%–fairly-well capitalized.
Though company-wide margins may face some pressure (wind pricing was a headwind this quarter), GE said that it expects margins to improve this quarter and that it is targeting double-digit operating earnings-per-share growth in 2012, levels we think are achievable (given its huge backlog). All things considered, we think GE’s report is yet another data point suggesting US economic health and a not-so-unhealthy global stage. We’d consider picking up the firm’s shares if its annual dividend yield reached 4.5% (it’s currently at about 3.6%), which we believe is an adequate margin of safety given concerns in Europe and the implications on GE’s financial segment.