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TheStreet Open House

GE Investors Watch Earnings for Industrial Margin

NEW YORK (TheStreet) -- General Electric (GE) is heading into a major transition for its finance arm, but investors will be focused on whether or not the company met industrial margin expansion goal for 2013.

GE will announce its fourth-quarter results on Friday, with analysts polled by Thomson Reuters on average expecting earnings of $5.046 billion, or 53 cents a share, increasing from $4.666 billion, or 44 cents a share, during the fourth quarter of 2012. Analysts expect the company's revenue to rise 2% year-over-year to $40.224 billion for the fourth quarter.

Full-year earnings for 2013 are expected by analysts to increase to $16.572 billion, or $1.64 a share, from $16.065 billion, or $1.52 a share, during 2012.  Revenue is expected to decline to $146.139 billion for 2013 from $147.359 billion a year earlier. Shares of GE closed up 1.3% Wednesday at $27.34.

GE reported an industrial profit margin of 14.6% for the first three quarters of 2013, increasing 40 basis points from a year earlier.  CEO Jeff Immelt during a meeting with investors on Dec. 18 said the company was "on track" to meet its goal of expanding the industrial margin by 70 basis points for the full year. Immelt also said, "We have set a goal for 2016 to be about 17% from a margin standpoint."

Another one of Immelt's long-term goals for the company has been to transform its mix of businesses so that roughly 70% of operating earnings are derived from the company's industrial units, with the remaining 30% contributed by GE Capital.  GE Capital contributed 47% of GE's operating earnings during the third quarter.

GE in November announced it would spin off its North American consumer finance unit through a transaction that will be tax-free for GE shareholders and include an initial public offering of up to 20% of the equity in the new company. The IPO is expected to be completed "later in 2014," after which General Electric plans to make a complete exit from the consumer finance business by distributing its remaining 80% stake of shares in the new company on a tax-free basis during 2015.

The company also said it might decide to complete the disposal of the consumer finance arm by "selling or otherwise distributing or disposing of all or a portion of its remaining interest in the Retail Finance shares."

GE had already made tremendous progress in shrinking GE Capital, with the unit's "ending net investment" (ENI), which excludes non-interest bearing liabilities, cash and equivalents, declining to $385 billion as of Sept. 30, from $425 billion a year earlier. GE Capital will shed another $50 billion or so through the spinoff of the consumer finance unit, bringing the unit within Immelt's long-term ENI target range of $300 billion to $350 billion.

Fourth-quarter results are expected to be boosted by some extraordinary items for GE Capital, including the spin-off of its consumer finance business in Switzerland through an initial public offering that was completed in October.  GE Capital Keith Sherin during an investor conference in November said the company had "sold a little under 70% of that business, and we will have a substantial gain that we will record from that transaction in the fourth quarter."

In his fourth-quarter earnings preview for U.S. industrial firms, Oppenheimer analyst Christopher Glynn on Jan. 8 wrote, "We anticipate GE's 4Q results will likely exceed our consensus-matching $0.53 estimate."  Backing this anticipation is 19% year-over-year growth for industrial orders  during the third quarter, along with a "solid backlog build since 3Q12."

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