Macro Wrap – Efficiency is the Master Word, $GE, $HON Earnings

by Enis July 19, 2013 8:05 am • Commentary

Earnings season is in full swing.  Financials have been almost uniformly strong, while large cap tech has struggled, with GOOG and MSFT grabbing headlines last night on weak results (dismal in the case of MSFT).  What about the lesser followed industrials that reported this morning?

GE beat by a penny on earnings and missed by 1.5% on revenue expectations.  Highlights from management:

We executed in a business environment that was slightly improved versus the first quarter.  Emerging markets remain resilient, and in the U.S. we saw strong growth in orders this quarter.  Europe is stabilizing but still challenged.

Industrial segment margins rose 50 basis points in the quarter.  Strong price performance and material deflation contributed to $293 million of positive value gap. GE remains on track for planned margin growth of 70 basis points for the year.

Amazingly, GE sales are actually down on an annual basis since 2010 (partly reflecting the reduction of its GE Capital portfolio, partly reflecting slow growth overall), but profits are up 40% since 2010.  Cost cutting remains a major focus for management.  Meanwhile, geographically, the U.S. was the standout leader among the major regions.

GE stock is up 2% in the pre-market, flirting with its $24.45 high for the year.

HON, another diversified industrial company, also reported this morning, beating earnings by 5% and essentially matching the revenue expectations.  Highlights:

Despite operating in a slow growth macro environment, we saw good organic growth in ACS’s Energy, Safety and Security business and in Turbo Technologies, both of which continue to outgrow the key end markets in which they compete.  Our long-cycle businesses, including Commercial Aerospace, Process Solutions, and UOP, also continue to perform well, benefitting from favorable macro-trends, winning new contracts, and maintaining a strong backlog, which currently stands at $15.5B.  We remain focused on seed planting, funding cost savings initiatives across the portfolio, and remaining flexible given the continued uncertain global economic outlook.

Interestingly, of HON’s four major segments, aerospace is the only one with year-over-year sales growth.  The story, and management focus, for management continues to be cost savings initiatives, as revenue growth is lacking overall.  But HON has been an efficiency machine – since 2010, revenues have growth about 18%, while earnings have grown about 65%.  Whether it’s better margins, lower interest expense, lower taxes, or lower share counts, management has made sure the EPS number has grown with or without sales growth.

HON stock is close to unchanged though after weaker Q4 guidance (it’s also already up 30% year-to-date).

GE and HON provide a good snapshot of how many of the large U.S. multinationals have grown earnings in the past few years with weak global growth.  Efficiency is the master word – and it’s a major part of the explanation why corporate reinvestment has remained weak while profits have remained strong.