GE Slides as Power & Water Unit Saps Industrial Profit

Story originally appeared on Bloomberg.

General Electric Co. (GE) fell the most since 2011 after a first-quarter slide in its Power & Water business pulled total industrial earnings down 11 percent.

Profit at GE’s manufacturing businesses fell to $2.94 billion as sales slid 5.7 percent to $22.7 billion, the company said in a statement. The decline was led by a 39 percent drop in earnings at the power and water unit, which makes products including gas-powered and wind turbines.

“We planned for a continued challenging environment in Europe, but conditions weakened further,” Chief Executive Officer Jeffrey Immelt said in the statement, with manufacturing and service revenue in the region declining 17 percent.

The slide makes it tougher for the Fairfield, Connecticut- based company to achieve the industrial growth targeted in its full-year plan and emphasized in incentive-pay packages. The profit margin at GE’s industrial businesses contracted 71 basis points in the quarter, roughly the amount that Immelt had predicted they would grow in the full year.

“Industrial profits were much weaker than we expected,” said Jeff Sprague of Vertical Research Partners Inc., who has a hold rating on GE. There’s “substantial doubt” that the company can reach Immelt’s target now, he wrote.

GE’s 4.1 percent drop to $21.75 in New York was the largest decline since November 2011. The shares previously gained 8 percent this year, compared with an 8.1 percent advance for the Standard & Poor’s 500 Index.

Weaker Europe

The power and water division saw its margin shrink by 3.2 percentage points, the most of any unit. It will be hard for the business to equal its 2012 profit of $5.24 billion, Immelt said on a conference call with analysts.
“Europe was weaker than we expected, and in particular the power and water and oil and gas businesses were very soft,” Nick Heymann, an analyst at William Blair & Co. who has a market-perform rating on the stock, said in a telephone interview.

The company’s industrial revenue growth, excluding the effect of acquisitions, will probably be closer to the lower end of its 2 percent to 6 percent projection, Immelt said on the call. He reiterated the 70 basis point margin-growth target.

Aviation sales climbed 3.7 percent and transportation increased 12 percent. That boosted GE’s equipment and services backlog to a record $216 billion.

GE Capital’s earnings climbed 8.7 percent, driven by real estate advances.

NBC Sale

Companywide, adjusted profit from continuing operations rose 13 percent to $3.63 billion, or 35 cents a share, the company said. That matched the 35-cent average estimate of 13 analysts surveyed by Bloomberg.

The figure excludes gains from GE’s $18.1 billion sale of its stake in NBC Universal in February, which boosted profit by 4 cents per share, the company said.

Immelt has already begun to redeploy the proceeds, spending $3.3 billion to acquire Lufkin Industries Inc. (LUFK) and accelerating share buybacks.

Revenue in the quarter was little changed at $35 billion, GE said, topping the $34.6 billion average estimate in a Bloomberg survey of nine analysts.

Counting pension costs and discontinued businesses, GE’s net income rose 16 percent to $3.53 billion, or 35 cents a share, from $3.03 billion, or 30 cents, a year earlier.