Listening to a GE earnings call sometimes feels as difficult as keeping up with characters in Tolstoy’s Anna Karenina. There are a lot of moving parts — the Synchrony spin-off, sale of the appliances business to Haier, acquisition of Alstom, simultaneous JV agreement with another part of Alstom, currency fluctuations, and so on. Like IBM, GE does not publish a statement of cash flows with its earnings announcement, so I will not be able to analyze the company fully for another few weeks, but here are the points that stood out to me:
- GE is seeing strong organic growth in global markets, despite the impression you may be getting from listening to the financial and popular media. Immelt quipped that “I have a difficult time reconciling this [strong order growth] with the mood that is in the markets.”
- The oil and gas business is bad. No news there — a lot of energy-related capital spending projects are being cut, and this is impacting GE, just as it is other energy sector service providers. The company had previously announced $400 million of energy segment “cost out” programs in 2016 and today announced that another $400 million in cuts were being targeted for this year. GE managers implied they expected $30 / bbl oil to continue for awhile.
- The US Dollar is strong. No news there either. GE reported falling nominal revenues for some of their segments, but noted that adjusting for currency, revenues actually saw single-digit percentage growth. The Synchrony spin-off made forecasting GE’s 2015 revenues hard enough, but the effect of the strengthening dollar makes it as hard as shooting trap on the deck of a Coast Guard rescue boat. The good news about GE is that, like IBM, foreign exchange exposure is non-existent due to the natural hedge of most of its revenues and costs being denominated in the foreign currency. An exception is aviation, where it is billing in USD (i.e., making its products more expensive to foreign buyers), but the company reported normal aviation order flow overseas.
- Renewables looked weak. Recently, GE began splitting out its Renewable Energy business separate from its former “Power and Water” segment and the numbers for 2015 (both revenues and orders) were down some. Management explained that this had to do with transition to a new product cycle and a tough “comparable” in the U.S., but considering that the price of fossil fuels have fallen so much over the last year, it’s no wonder that orders for fossil fuel alternatives would be light. Hopefully, for the sake of the future survival of our species, GE’s Renewable Energy segment sees stronger demand in the future.
- 2016 dividends will be around $8 billion and buybacks will be on the order of $18 billion. Those who have followed me for some time know that I am generally suspicious about buyback policy, but in GE’s case, it makes sense. They are issuing shares to managers, so some of the buyback activity just soaks up dilution, but overall, the policy makes sense vis-a-vis the (welcome) shrinking of GE’s exposure to retail finance.
I’m leaving now to catch a flight to Tampa for 2016’s first IOI 101 / 102 training weekend! Consider attending one of these events in the future to learn how to quickly and efficiently cut through the static of the financial media’s noise machine, focus in on the key drivers of value for any company, and tilt the balance of risk and reward in your favor using a prudent combination of stocks, options, and cash in reserve.
To Learn More Fill Out the Form Below