Jul 20, 2013, 01.40 PM IST | Source: Reuters

GE order book surges; may be good for global manufacturing

GE's presence in most parts of the global economy, including energy, finance, manufacturing and transportation, makes it a harbinger of macroeconomic trends.

GE order book surges; may be good for global manufacturing

General Electric Co (GE.N) on Friday unveiled a surprise jump in its backlog of orders for locomotives, X-ray machines and scores of other industrial products, boosting the conglomerate's shares and stoking hopes for gains in manufacturing around the world.

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GE's presence in most parts of the global economy, including energy, finance, manufacturing and transportation, makes it a harbinger of macroeconomic trends.
 
"Many customers have moved from the 'doing your homework' stage toward moving pen to paper and placing orders," said Morningstar analyst Daniel Holland. "It is encouraging to see customers willing to sign agreements for a new piece of capital equipment. That indicates a level of certainty in the economic situation."

GE's backlog at the end of the second quarter was up 4 percent from the end of the first quarter to USD 223 billion, a staggering figure that gives the company plenty of work across its seven industrial units. The order book rose 20 percent in the United States alone.

"This is as close as GE comes to a positive surprise as possible," said Tim Ghriskey of Solaris Asset Management, which owns GE shares.

Orders for jet engines, subsea oil blowout preventers, and other aviation and energy products comprise large chunks of the backlog and are widely considered to be among GE's strongest growth areas, drawing the most optimism from shareholders.

The Fairfield, Connecticut-based company said profit fell in second quarter, mainly due to a smaller finance unit, which GE has been downsizing since the financial crisis in a bid to reduce risk.

But the results were better than expected, and Chief Executive Jeff Immelt said GE remains on track for a "good year." Its shares closed up 4.6 percent at USD 24.72 Friday on the New York Stock Exchange.

At the same time, Immelt cautioned against expectations for a surge in profit late in 2013.

"We are not planning for an improved environment for the balance of 2013, but execution levers are in our control: a solid backlog, good technology, strong cost control, and disciplined capital allocation," Immelt said on a conference call with investors.

Some analysts remain skeptical that the conglomerate will be able to achieve its goal of boosting 2013 margins by 0.7 percent. GE's 2012 operating margin was 11.8 percent.

"That will require Herculean improvement in the second half," said Nick Heymann, an analyst at William Blair & Co, which trades GE shares.

The trick is for GE to turn around orders quickly so it can collect revenue from customers. It cannot recognize the USD 223 billion in orders as revenue until it delivers products to customers.

Some investors said they would prefer GE focus on turning orders into revenue as quickly as possible.

"To me, the backlog on orders is a mixed bag because it continues to reoccur," said Oliver Pursche, president of Gary Goldberg Financial Services, which owns GE shares. "That to me speaks of a business management issue."

GE, the world's largest jet engine manufacturer, announced more than USD 26 billion in jet engine orders last month at the Paris Air Show. Earlier this month, it closed on its nearly USD 3 billion buyout of oilfield pump maker Lufkin, broadening its offerings of pumps that pull oil and gas to the surface.

Sales in both its oil and gas and aviation units rose 9 percent in the latest quarter.

"Among investors, I think there was quite a bit of concern that this quarter was going to be a more challenging one," said Jack DeGan, chief investment officer at Harbor Advisory Corp, which owns GE shares. "I was pleasantly surprised that the quarter came in as strong as it did."

GE CAPITAL SHRINKING

The shrinking of the finance unit, GE Capital, dented overall results, though it has been expected on Wall Street and has long been among Immelt's goals.

GE Capital's revenue fell 3 percent from a year earlier, and its earnings dropped 9 percent.

GE transferred its chief financial officer, Keith Sherin, to run GE Capital earlier this month to help oversee the streamlining of the unit.

GE Capital nearly sank the whole company during the 2008 recession, highlighting why Immelt and his team want to shrink it. Still, the unit brought in nearly one-third of GE's overall revenue in the second quarter and wrote a USD 1.9 billion dividend check to its parent company, showing just how large it is.

Immelt expects GE Capital to pay USD 6.5 billion in dividends this year to the parent company.

Last month, U.S. regulators said GE Capital was "systemically important" to the U.S. financial system, a designation commonly known as "too big to fail." That effectively means it will be scrutinized more closely by the U.S. Federal Reserve and may be required to hold additional capital reserves.

"GE Capital is shrinking quicker than expected," said Perry Adams of Northwestern Bank, which owns GE shares. That's "good from a capital allocation standpoint," he said.

GE's second-quarter net income fell to USD 3.69 billion, or 36 cents per share, from USD 4.01 billion, or 38 cents per share, a year earlier.

Analysts expected 35 cents per share, according to Thomson Reuters I/B/E/S.

Immelt said a 1 cent charge in the quarter was related to a USD 300 million investment made last year in Brazil's Grupo EBX, a mining, energy and logistics conglomerate controlled by embattled billionaire Eike Batista.

Shares of most companies within EBX have plummeted this year, with debt trading at levels suggesting default.

GE's quarterly revenue fell 4 percent to USD 35.1 billion. Analysts were looking for USD 35.56 billion.

GE has aggressively cut costs, including making layoffs, and said it has sliced expenses by more than USD 474 million so far this year. It declined to give details.

The company plans to keep research spending flat in 2013.

GE stock closed up even as the broader markets dipped. Its shares are up 12.6 percent so far this year. Earlier in the day, the 5 percent rise in GE accounted for a positive effect of 8.5 points on the Dow Jones industrial average .DJI.

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