GE has been shifting its focus to emerging market growth, oil services and energy demand to reduce reliance on the volatile financial services sector – and those moves are paying off.
GE beat expectations with first-quarter earnings of $3.4 billion, or 31 cents a share, up 48% from a year earlier. This was the fourth consecutive quarter in which GE grew its earnings.
"GE has emerged from the recession a stronger, more competitive company," said Chief Executive Officer Jeffrey Immelt. "Strategic investments in high-growth segments have strengthened the company's Energy portfolio and positioned that business to return to growth in the second half of this year."
Overall revenue hit $38.4 billion, beating analysts' expectations of around $34.6 billion.
GE no longer provides numeric profit forecasts, but analysts expect earnings per share to rise 16.5% this year, according to Thomson Reuters.
"This is the best earnings outlook we've had in the last 10 years," Chief Financial Officer Keith Sherin said at the company's April 27shareholder meeting.
To shareholders' delight, General Electric since December has increased its dividend three times, most recently by one cent on April 21. It's now at 15 cents a share – an improvement after falling to 10 cents in 2009 – with room to climb back to the 31-cent quarterly dividend it paid out before the financial crisis.
GE's stock price has tripled from its recession low of $6 a share, when it plunged 83% from September 2007 to February 2009. GE shares rose 21% in 2010 as earnings rose 15%. Shares are up about 10% year-to-date, closing yesterday (Thursday) at $19.90.
And thanks to its new business focus, analysts expect it to continue climbing.
Focus on Industrial Growth
Standard & Poor's rating service was so concerned that GE's financial arm would tank and drag the rest of the business down that in March 2009 it lowered the global conglomerate's "AAA" credit rating.
GE Capital, the financial part of GE's vast business, has rebounded since the financial crisis and contributed $1.84 billion – three times as much as 2010's first quarter – to GE's overall profit, about 38% of its total.
Still, Immelt is expanding investment in other areas to reduce reliance on the troubled financial markets. He has limited the profit target for its financial sector to 30% to 40% of total profit.
Besides its financial sector, GE's operating segments include Energy Infrastructure, Aviation, Healthcare, Transportation, and Home and Business Solutions. GE has stressed that its industrial business is more important to its future than the financial arm, as the global economic recovery pushes demand for more energy, aviation and transportation equipment.
The industrial and energy sectors so far this year have been the best performing stocks in the Standard & Poor's 500 Index, and GE has its hand in both. It's the world's biggest provider of power-generation equipment, solar panels, jet engines, and gas, wind and electric turbines.
To strengthen GE's industrial business, CEO Immelt announced in October he would go on a global shopping spree with the company's $20 billion in discretionary cash.
Turning High Oil Prices into Big Profits
Immelt went on the hunt for small, "bolt-on" purchases valued between $1 billion to $3 billion. He also wanted to position the company to profit from rising oil prices, which have climbed to over $100 a barrel this year, so he targeted the oil services and power generation industries.
GE started in October with a $3 billion purchase of oilfield equipment maker Dresser Inc. Analysts said companies like Dresser were "cruising in the sweet spot," as rising oil prices increased the need for those businesses.
GE in December targeted Brazil's oil production wealth with a $1.3 billion purchase of U.K.-based Wellstream Holdings PLC. Wellstream supplies offshore production equipment to companies like Exxon Mobil Corp. (NYSE: XOM) and Petroleo Brasileiro SA (NYSE ADR: PBR) that explore the deepwater oil fields off Brazil's coast, estimated to hold up to 20 billion barrels of oil.
Oil production in foreign countries is expected to ramp up in the years ahead to meet growing global demand.
"Since 2005, the global deepwater fleet has doubled, and we believe further deepwater field investments will be needed as global demand for energy continues," Nicholas Heymann, an analyst with Sterne Agee & Leach Inc., wrote in a note to investors.
In February, GE spent $2.8 billion on the well-support division of Scotland's John Wood Group PLC, acquiring equipment that helps extract more oil and gas from mature fields.
Finally, GE announced in March that it would spend $3.2 billion for a 90% stake in Converteam, a France-based energy company focused on high-efficiency electric power conversion components like motors, generators, drives and automation controls. These components are used by oil and gas companies as well as solar and wind power projects.
So far GE has spent about $11 billion on acquisitions in energy. Immelt said the 2011 spending is likely over as the company collects profit on its billion-dollar investments.
Rocky Road to Recovery
GE's robust earnings growth has helped brighten its outlook after news earlier this year threatened the company's future.
GE took heat after the March 11 Japan earthquake because it designed all the Fukushima Daiichi power plant's nuclear reactors. When the reactor's containment vessels were damaged in the quake and resulting tsunami, they couldn't contain the radiation as the fuel rods heated.
GE's containment systems were known for being smaller than competitors', and many used at plants in the United States have been modified over the past few decades. GE stood by its designs, calling its reactors "the industry's workhorse with a proven track record of safety and reliability for more than 40 years."
Some experts say liability will likely fall to the Fukushima plant, and not in GE's products, due to Japan's regulatory policy.
GE also drew criticism this year for a tax strategy that allowed it to avoid paying billions in U.S. taxes.
GE earned $14.2 billion in global profits last year, with $5.1 billion from U.S. operations. But instead of paying taxes, GE got a tax benefit of $3.2 billion.
GE's strategic tax department has found ways to reduce its percentage of taxed U.S. profits, mostly through aggressive tax lobbying efforts and holding many profits overseas. GE reported in March that its tax burden was only 7.4% of its American profits, including those that will only be paid if the company brings its overseas profits back to the United States.
With the top U.S. corporate tax rate at 35%, many multinational companies like GE have been using creative tax strategies to avoid forking over so much of their American profits to Uncle Sam. Many with overseas operations keep those profits overseas to avoid U.S. taxation.
Companies employing such strategies are criticized for contributing to a drastic reduction in U.S. corporate tax receipts from 30% of federal revenue in the 1950s to 6.6% in 2009. People say the payment avoidance hurts the U.S. economy at a time the government needs the revenue.
"In a rational system, a corporation's tax department would be there to make sure a company complied with the law," Len Burman, former Treasury official and current scholar at the Tax Policy Center, told The New York Times. "But in our system, there are corporations that view their tax departments as a profit center, and the effects on public policy can be negative."
But these multinationals say their high U.S. tax burden stunts competitiveness with foreign rivals, and big overseas profits benefit U.S. business.
"We believe that winning in markets outside the United States increases U.S. exports and jobs," John Samuels, GE's tax department head, told The Times through a spokeswoman. "If U.S. companies aren't competitive outside of their home market, it will mean fewer, not more, jobs in the United States, as the business will go to a non-U.S. competitor."
U.S. President Barack Obama is considering an overhaul of the U.S. corporate tax code. Obama will tackle the subject with the Council on Jobs and Competitiveness, which is headed by Immelt.
"He understands what it takes for America to compete in the global economy," President Obama said of Immelt's appointment in January.
GE's increasing global reach is part of what it hopes will drive growth going forward. The growing global position also means its workforce is shifting from a heavy U.S. presence to the majority hired overseas.
In 2000, 46% of GE's employees were overseas; that number is now up to 54%. From 2005 to 2010, GE cut 1,000 workers abroad while letting go 28,000 in the United States.
Immelt said the lower number of foreign workers cut represent a shifting customer base, not cheaper labor costs. Today, 60% of GE's business is overseas, up from 30% in 2000.
"We've globalized around markets, not cheap labor," Immelt said. "The era of globalization around cheap labor is over. Today we go to Brazil, we go to China, we go to India, because that's where the customers are."
News and Related Story Links:
- Money Morning:
Hot Stocks: General Electric is Being Powered by China Growth, but Held Back by its Financial Arm
- Money Morning:
Corporate Tax Holiday Could Put $1.2 Trillion in Shareholders' Pockets
GE not focused on regaining triple-A, says CFO
- Bloomberg News:
GE Agrees to Buy $2.8 Billion Oil-Service Unit; Shares Surge
- Bloomberg News:
Wellstream Brings GE Energy to $4.3 Billion in Deals
- The Wall Street Journal:
Big U.S. Firms Shift Hiring Abroad
- The New York Times:
G.E.'s Strategies Let It Avoid Taxes Altogether
- The Financial Times:
GE says growth outlook is ‘very strong'
- The Financial Times:
Materials costs squeeze US industry
GE to Buy Dresser for $3 Billion to Bolster Oil, Gas
- The New York Times:
Experts Had Long Criticized Potential Weakness in Design of Stricken Reactor