GE: Good Sales, Poor Cost Controls

GE’s (NYSE: GE) bottom line looked very good, until the numbers were examined by division. Revenue from continuing operations was up 6% to $38.4 billion. GAAP EPS was up 48% to $.31.

But, many of GE’s largest business posted better revenue growth than segment profit. Energy infrastructure sales rose 9% to $9.5 billion, but segment profit was down 7% to $1.4 billion. Healthcare revenue was up 10% to $4.1 billion. Segment profit was up only 7% to $531 million. Aviation profit growth only kept pace with sales improvement. Each was up 5% to $4.4 billion and $841 million respectively

It was GE’s financial service business which made the firm’s bottom line balloon. The segment results rose from $583 million to $1.84 billion on a sales increase of 3% to $12.3 billion. “GE Capital also had a strong first quarter, earning $1.8 billion after tax,” CEO Jeff Immelt said. “With losses having peaked, we are originating new business at attractive margins and our funding costs continue to be favorable. Reserve coverage decreased slightly in the quarter, driven by improving portfolio quality. Since the first quarter of 2010, we’ve improved our GECC Tier 1 common ratio to 9.8% from 7.8% and reduced GECC leverage to 4.5:1 from 5.5:1. We have strengthened the GE Capital franchise and are on track for solid earnings growth.”

The financial service industry improvement lifted most boats, including GE’s

The numbers from GE Capital mask weakness in the conglomerate’s other business, and particularly cost control

Douglas A. McIntyre