GE’s slight positive earnings report and it’s about to change

Previous post about GE:


On April 17, 2015, General Electric (NYSE:GE) reported Q1 2015 earnings results. GE reported $34.09 billion and $5.08 billion in segment revenue and profit, respectively, compared to Q1 2014 results of $35.06 billion and $5.21 billion in segment revenue and profit, respectively. In earnings per share (EPS) terms, GE reported EPS of $0.31 per share, which compares against $0.33 per share in the same quarter last year, down 6% year-over-year, but still managed to beat the consensus estimate of $0.30 per share.

Their earnings were impacted by Forex market and significant charges related to GE Capital exit activities. During the Q1 2015 conference call,  Mr. Jeffrey Bornstein, Senior Vice President (SVP) and Chief Financial Officer (CFO) for GE, highlighted a common issue felt by many international companies: “Foreign exchange was approximately $940 million drag on Industrial segment revenue and about $120 million impact on op profit.” Almost $1 billion currency market impact only effected 4% of industrial revenue. However, the management stated “Despite this headwind, industrial segment operating profit was up 9%.


GE Industrial Segment Revenue year-over-year
GE Industrial Segment Revenue year-over-year


As seen above, the picture shows Industrial Segment revenue year-over-year. There was not much of change. I believe it’s going to change since GE is taking a bold move.

Even though GE faced many headwinds, including from foreign exchange and low oil prices, they still managed to grow. Strong dollar and low energy prices are only temporary. It’s just a matter of time before the dollar depreciates and oil prices rebound. I have no doubt that GE will continue to succeed.

GE recorded a health margin improvement in the 1st quarter. Industrial segment gross margin increased 90 basis points (bps), or 0.9% to 26.2%, while operating profit margins increased by 120 bps, or 1.2% to 14.6%. The company is cutting costs and simplifying operations to lift margins, which is a positive sign.

Recently, GE announced to reduce the size of its financial arm, GE Capital, significantly. Last quarter, revenue from GE Capital fell 39%. This is because GE have already started reducing the size of GE Capital to become an industrially focused company, which I look it as positive in the longer term. A negative side of GE Capital reduction are taxes. GE will be losing out on significant tax breaks. GE Capital has helped GE lower its effective tax rate in the past. In 2014, GE’s effective tax rate was around 10%. Now, it moved up to about 23%. While this is a big difference, it should not be concern for investors, because it is in line with other industrial companies. Financial companies are the most vulnerable to shocks of the global financial markets. Thus, GE is taking the right move to spin off its financial unit. In a long-term, I believe more focused industrial company is positive for GE.

GE is known for its dividends. GE pays shareholders $0.92 annual dividend, or 3.43% yield, which is really impressive.

GE expects double-digit Industrial operating EPS growth to $1.20-$1.20 per share, 2%-5% industrial segment organic revenue growth, and increased margins. The company also expects high-value industrial to comprise more than 90% of GE earnings by 2018.

To conclude, I plan to hold my position (more details on previous post: I will be adding more shares through dividend reinvestment, or Dividend Reinvestment Plan (DRIP) program. I also might buy additional shares. I strongly believe GE’s restructuring plan will lead to significant capital appreciation and I have no doubt GE will increase its dividend distribution.


General Electric (NYSE: GE) Hourly Chart
General Electric (NYSE: GE) Hourly Chart


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GE’s massive makeover

Last Friday (April 10, 2015), General Electric (GE) announced a plan to sell off real estate and reduce the size of their financial business. They will be selling majority of GE Capital Real Estate assets for about $26.5 billion. GE will also sell away the remaining portion of GE Capital. It aims to complete the sale of GE Capital over the next two years.

GE’s financial unit is one of the largest financial entities, with assets of half a trillion dollars. It includes everything from consumer loans to property. When the financial crisis hit, earnings from GE’s finance unit collapsed. There were (still is) strict regulations on financial services. As a result, Jeff Immelt, CEO of GE, promised to shrink the finance arm.

Ever since the financial crisis, G.E. has taken small steps to shrink its finance operations. Last year, it spun off its private-label credit card business, known as Synchrony Financial (Ticket: SYF), for $2.9 billion initial public offering (IPO).

To who? GE said it would sell nearly all of its real estate portfolio to investors including Blackstone Group and Wells Fargo & Co for $26.5 billion. There are a further $165 billion of assets that needs to be sold. There will be buyers other than Blackstone Group and Wells Fargo & Co. The company plans to keep the finance assets directly related to selling its products such as jet engines, medical equipment, and electrical grid gear. Remember; Warren Buffett has a stake in both GE and Well Fargo. I believe Warren Buffett will be increasing his stake in GE.

Why now? GE is selling their real estate and financial business for two reasons. First, commercial real estate prices are up. Commercial real estate prices are higher today than it was before the financial crisis. Lastly, rates are still low. If the Fed hikes interest rates (cost of borrowing rises), it will be unattractive to finance any deal. Therefore, it’s a perfect time to take an advantage of the low rates and the high prices.


GE is taking the right move, by focusing more on industrial sector. By beginning to sell $26.5 billion worth of real estate assets, GE will be returning to a kind of company it is supposed to be, an industrial company. GE’s operations include jet engines, oil drilling equipment and medical devices. I would not be surprised if GE makes industrial acquisitions, both small and big. I would not even be surprised if GE merges with another industrial business.

Investors are very happy with the deal, including me. General Electric’s stock (Ticker: GE) rose more than 10%, on a heavy volume, to $28.68, highest since September 2008. On Friday, more than 350 million shares (GE) were traded. GE expects to return more than $90 billion in cash to investors through dividends, share buybacks and the Synchrony exchange through the end of 2018. $50 billion will come from a share repurchase program, one of the biggest on record. As of January 31, GE had 10.06 billion shares outstanding. GE expects to reduce it by 20% to 8-8.5 billion by 2018. In the longer term, the stock price will continue to increase.

GE (General Electric) - Daily
GE (General Electric) – Daily

Not only GE wins here, but also Uncle Sam. GE will bring back $36 billion in cash that resides overseas and will have to pay tax to the U.S government, ranging from $4 billion to $6 billion.

GE said it would take after-tax charges of about $16 billion for the restructuring in the first quarter, with $12 billion being non-cash charges. It will reduce their Earnings Per Share (EPS). On Friday (April 17, 2015), GE will report their first quarter earnings.

GE expects that by 2018 more than 90% of its earnings will be generated by its industrial businesses, up from 58% in 2014.

Past & Future:

GE's past and future
GE’s past and future (source:


 Note: I currently own shares in GE, which I brought last year at $25.83. I plan to hold on to it. I may even buy more shares. I believe GE’s share-price will reach $38 by the first half of 2016.

If you have any questions, feel free to contact me, and/or leave comments. Thank you.

UPDATE: Click or click here.

Ugly Jobs Report Is Just Temporary

Last Friday (April 3, 2015), March non-farm payrolls came out very negative. Non-farm payrolls slowed in March to a seasonally adjusted 126,000, slowest since December 2013. Unemployment rate held unchanged at 5.5%. The downturn in the jobs report could delay the Federal Reserve’s plan on raising the interest rates. Federal Open Market Committee (FOMC) have said in the past that continued improvement in labor would be a key factor on the timing of the rate-hike. I, now, believe there is a little chance of rate-hike in June.

What caused the downturn in the labor market? I believe it was because of the bad weather, plunging oil prices, and the strong dollar. The bad weather have caused businesses, especially in construction, to lose profits and to halt hiring. However, weather is a transitory factor. Plunging oil prices have left the oil industry in the dust. Oil companies are not being able to make revenue/profit. As a result, they had to layoff some of their employees. Strong Dollar is putting pressure on export-driven manufacturers, resulting in lower sales leading to layoffs. It’s also making it harder for U.S. businesses to sell goods aboard. I believe majority of U.S businesses’ revenue or earning per share (EPS) will less than expected, for the quarter.

Not only did we get to see March jobs report, but there were revisions to February and January jobs reports. January job creation was revised lower to 201,000 from 239,000 (-38,000). February job creation was revised lower to 264,000 from 295,000 (-31,000). I believe March jobs report will also be revised.

The labor-force participation rate was at 67.8%, lowest since February 1978. It shows that there’s less confidence in jobs market. Therefore, people have stopped looking for jobs. Average hourly earnings rose 7 cents or 0.3% to $24.86. The earnings can be a indicator for inflation. If it increases, inflation is more likely to increase too. Walmart and McDonald are increasing wages for majority of its employees, if not all of them.

Reactions to the report:

U.S Dollar (foreign exchange, or Forex) reacted negatively. U.S Equity markets were closed for Good Friday. We will get to see the reaction of equity market in the morning (Monday, April 7, 2015). I believe it will rise since negative jobs report could delay the rate-hike, since low interest-rate environment can very attractive to investors, including me.


If you have any questions, feel free to contact me anytime and/or leave comments. Thank you.