General Electric As An Industrial Proxy
Moving into the business investment side of the US and global economy, GE’s fourth quarter and full year results were the worst since 2009, by far. However, as all corporate management does, the perspectives surrounding the numbers have been flattered by selective comparisons. The highlight of the quarter was the industrial segment’s 5% growth in revenues, which was better than previous quarters – thus lowering the standards by which the company would be judged. In Q4 2008, the industrial segment managed 7% growth amidst near-total economic chaos. Comparisons matter.
For the full year, total revenue (including GECC) was flat at $146 billion; industrial sales were also flat at $101 billion. Total cash flow generated was $17.4 billion, a pretty positive number given the malaise in the top line. That matched full year operating earnings, which were up 5% Y/Y to $16.9 billion. EPS managed a bit better at 7% Y/Y.
Operating margins for GE jumped almost 300 bps in Q4, to 19.7%. A good proportion of that improvement was due to GECC’s profit numbers, but the industrial segment also saw a large improvement in profitability through margins (+60 bp). That meant the company kept a close watch on its cost structure, the only method, absent any revenue growth, to keep profitability on the growth track.
As has been typical, the company returned more cash to shareholders than it generated in actual cash flow. With a mix of $7.8 billion in dividends and $10.4 billion in share repurchases ($18.2 billion total), both up from 2012, GE netted a negative cash flow balance factoring in financial “investment.” The company also used $9 billion in cash for acquisitions. Without these purchases, the industrial segment would have had negative revenue growth on the year.
So the company spent upwards of $27 billion to maintain 0% revenue growth and less than 8% EPS. For the calendar year 2013, not an exact comparison but close enough, the stock price increased by a third.
You can see why from management’s perspective that they would be so careful regarding cost structure. That makes it utterly irresistible to use its vast financial resources in order to “manage” the corporate picture. For them, and their shareholders, the $27 billion was well spent.
It is incredibly short-sighted, but that is the nature of the current marketplace. Because of the inordinate attention on costs, given the lack of true revenue advancement, the company’s asset base suffers under lack of productivity engenderment as capex is slowly squeezed. At some point, the attention to margins will reverse as equipment costs begin to rise in terms of only replacement rather than advancement.
This gives us a proxy for a different cross section of the bifurcation in the US economy. The reasons for it are self-explanatory – management gets paid via stock prices and thus reacts in terms of that “currency” alone. That this is short-sighted is lost on the investor public because it is all noise. Despite the robust appearance of a 33% return in 2013, the stock price is now only back to where it was in 1997. And if you think that is all due to GE Capital and the Panic of 2008, you probably haven’t looked at the interior of the balance sheet and cash flow statements.
It is the perfect confluence for the economic malaise that is beset inside the US economy. Thinking only in terms of stock price, so very short sighted, is the recipe for longer term disaster not only in idiosyncratic corporate situations, but for the economy as a whole. While GE was busy not hiring more employees to expand its productive enterprises, focusing instead entirely on financial rejiggering, the economy as a whole suffers from income and employment difficulties. Correlation here is not coincidence as there is intuitive sense to it all that escapes the modern economist.
But at least GE as a proxy is far more attractive at zero growth than IBM and the larger service economy.
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