GE Starts Playing to Its Strengths


By Diane Brady General Electric has set itself up for a strong 2005 but hasn't quite delivered the goods just yet. While the Fairfield (Conn.) industrial and finance giant reported an 18% jump in net earnings in the fourth quarter on Jan. 21, to a record $5.4 billion, and delivered an 18% rise in sales, to $43.7 billion, GE's (GE) reduced tax rate undermined the perceived quality of those earnings.

Profits for the year came in $16.6 billion, up 6% from 2003. The stock actually dropped 0.68% to close at 35.12 on Jan. 21, though the overall market was also down.

Still, the results do point to a company that's well positioned to deliver good double-digit earnings growth this year. GE reported strong cash flow of $15.2 billion for 2004, an 18% increase over the previous year, and noted that orders are surging in several key businesses. Even GE Energy -- the unit that includes what was formerly known as GE Power Systems -- is getting out of a prolonged trough and will start to see more positive numbers.

ORGANIC GROWTH. What's striking about the fourth-quarter results is the degree to which the bets made by CEO Jeff Immelt and his team are starting to pay off. Three years ago, few would have pegged GE as company that could rely on strong organic growth. It grew by acquisition and was reliant on a range of financial businesses for half its earnings.

While the fastest-growing business units in the fourth quarter have been substantially beefed up by smart acquisitions in recent years, those businesses are also better positioned in their industries and should enjoy strong growth from here. GE Healthcare, which saw a 50% jump in profit, to $860 million, is enjoying the benefits of its acquisition of biosciences giant Amersham, completed last year. NBC Universal, beefed up with the acquisition of Vivendi's Universal Entertainment assets, saw earnings grow 60%, to $860 million. Even the film studio, a fickle business that would have given former GE chief Jack Welch hives, had a banner year with movies like Meet the Fokkers and Ray.

Other units are changing as well. GE's financial businesses, formerly GE Capital, were once seen by some investors as an ugly stepsister that spewed out profits but threatened to pull down the stock price as they accounted for half the profits (thus making GE more comparable to a bank, in some people's minds). Not only do the finance businesses now account for a lower percentage of the pie but the quality of those businesses has improved.

NO "TIME OUT" BUTTON. That will continue as GE keeps pulling out of insurance -- a slower-growth business that got whacked by the hurricanes this year and the World Trade Center attacks before that -- in favor of building a stronger presence in areas like commercial finance. "They have jettisoned a number of lower return-on-equity businesses," notes Deane M. Dray of Goldman Sachs.

Dray, for one, is impressed with how Immelt & Co. have managed to reposition GE and its portfolio. "It's not like you get a 'time out' button to do this," says Dray, pointing out that GE had to work through a number of other issues in its existing businesses while delving into new areas. Now, he predicts it will deliver on its promise of up to 17% earnings growth in 2005. "This is what they've worked for."

While some of the so-called headwinds may be diminishing in key businesses, challenges remain. One is managing to deliver equally strong results once the tax rate hikes up. While much of the lower tax bill resulted from the sale of GE's outsourcing business in India, the overall impact will be hard to match. What surprised many analysts was the rate on the industrial side of the business, which came in at about 16.7% in the quarter, vs. roughly 26% last year. "It's significantly lower and will jump again next year," says Tony Boase of A.G. Edwards & Sons.

"GOING THEIR WAY." While Boase is bullish about the stock for 2005, he thinks that senior management should have more explicitly acknowledged the positive impact of the lower tax rate this quarter. "They don't help their cause when they don't clearly call it out," he says. Yet that doesn't make him any less optimistic for this year. "In the grand scheme of things, the broader trends are going their way."

If so, that's sure to please investors who have been waiting for years to see GE return to its history of consistent double-digit returns. Brady is a senior writer for BusinessWeek in New York


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