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The Segment That Is Powering General Electric Towards Its Goal


  • In Q2 2015, the Power & Water segment had impressive earnings results.
  • The Oil & Gas segment continues to be a drag on the consolidated industrial revenue and earnings growth.
  • Looking out 12 months, GE is currently fairly priced at the $25 level but the company is still a great long-term buy.

General Electric (NYSE:GE) has relied heavily on the Power & Water ("P&W") and Aviation segments to provide strong revenue and earnings growth as it has sold numerous GE Capital assets. The reliance on the results from these two segments should continue for the foreseeable future due to the poor operating environment of the fourth largest industrial segment (Oil & Gas). The company made significant investments in the oil and gas industry before the downturn in commodity prices so GE has felt the pain (shown in the stock price) along with other companies in this industry.

In Q2 2015, the Oil & Gas segment accounted for 15% and 13% of the total industrial segment's revenues and profit, respectively. This is down from 18% and 16%, respectively, reported in the same period last year. The declining percentage is mainly a result of the segment struggling operationally, as the Oil & Gas segment's revenue has declined ~15% ($4.76 billion in Q2 2014 compared to $4.0 billion in Q2 2015).

On the other hand, the other industrial segments have been performing well over this period of time. In Q2 2015, the P&W and Aviation segments accounted for 49% and 57% of the total industrial segments revenues and profit, respectively. This shows how important these two segments are (and will be) to GE. Moreover, the P&W segment should provide the growth that will be necessary for the company to meet the previously provided guidance ($1.13-$1.20 in industrial operating earnings for 2015) while also continuing to invest for the future of the Oil & Gas segment.

A Deeper Dive - The Power & Water Segment

In Q2 2015, the P&W segment had revenue of $6.8 billion (YoY increase of 8%) and profit of $1.2 billion (YoY increase of 8%). For the quarter, the P&W segment accounted for 25% and 28% of the total industrial segment's revenues and profit, respectively. The reported 18% operating profit was consistent with the prior period.

(click to enlarge)

(Q2 2015 Earnings Presentation)

In Q2 2015, the P&W segment's revenue was positively impacted by both volume growth ($0.8 billion) and price increases ($0.1 billion), and negatively impacted by Foreign Exchange ($0.4 billion) when compared to the prior period. The Foreign Exchange ("FX") impact is nothing new, as GE has been greatly impacted by it over the past few quarters. For example, FX negatively impacted the Q2 2015 Industrial segment revenues and profit to the tune of $1.3 billion and $0.215 billion.

(Q2 2015 10-Q)

For the six months ended June 30, 2015, the P&W segment's revenue was $12.5 billion (up from $11.8 billion at June 30, 2014) and the segment's profit was $2.1 billion (up from $2.0 billion at June 30, 2014). Again, the year-to-date increases in revenue (~6%) and profit (~4%) are important to the company as the Oil & Gas segment has been facing significant headwinds.

Revenue Breakdown & Order Information

For the quarter, Service revenues were up 6% and equipment revenues were up 10%. The equipment revenue growth was positively impacted by the 53% increase in renewables with one major factor being the 806 wind turbines shipments in Q2 2015 compared to 510 shipments in Q2 2014.

The segment had strong orders growth and increased its already large backlog. The P&W segment reported orders of $7.8 billion, which translated into growth of 22% (up 27% excluding FX). This contributed to the ~1% YoY increase in the backlog. More importantly, the high margin portion of the backlog (services) increased from $52.3 billion at Q2 2014 to $54.3 billion at Q2 2015 (increase of ~4%).

For unit orders, the YoY increase in gas turbine and wind turbine unit orders were 80% and 24%, respectively. This brings the year-to-date gas turbine orders slightly below the figure for the prior period and the wind turbine orders ~11% ahead of the prior period. In addition, during the conference call management highlighted the fact that they expected strong growth for gas and wind turbines going into the end of the fiscal year. This should bode well for the P&W segment's upcoming results.

The P&W segment has reported stellar revenue and earnings growth in the most recent quarter, and by all indications this should remain the case for the remainder of 2015.


I discussed the current GE valuation in "General Electric's Q2 '15 Earnings: Industrial Results and Current Valuation", and the analysis in that article is still on point. There are several long-term catalysts that are not yet baked into the current stock price, but at the same time there is a great deal of uncertainty related to the future of this company. Therefore, based on the analysis and these factors I believe that GE is fairly priced at $25 (~4% below today's price).

Management has already made great progress towards the goal of having 90% of earnings come from the industrial businesses by 2018, and as a result the P&W segment will play a vital role in the future of this company. The results for this segment have been impressive over the past few quarters, and the segment will likely continue to impress in the upcoming quarters. Accordingly, the P&W segment is powering GE towards management's long-term goal.

Full Disclosure: I plan to add to my long position if the stock price drops to the mid-$25 range.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.