Two of America's most prized industrial conglomerates
reported second quarter results this morning. One has nothing but good news
while the other continues to struggle.
First, there is General Electric (GE 13.12, -0.61, -4.44%). GE has fallen from investors' grace after a series of ill-advised moves (in retrospect) left the company in the wrong place at the wrong time, in many respects.
Second quarter results did come in above analyst expectations. Adjusted EPS fell 10% to $0.19/share while revenue grew 3.5% to $30.1 bln, but organic revenue fell 6% as weakness in the Power segment was offset by growth in Aviation & Healthcare.
- Orders by segment: Power -26%, Renewable Energy -15%, Oil & Gas +2% (organic), Aviation +29%, Healthcare +7%, Transportation +42%, Lighting -28%.
GE said EPS and free cash flow would come in at the low end
of its prior ranges: EPS $1.00-1.07 and FCF $6-7 bln, respectively. However,
analysts had expected FY18 EPS below that range, and the company has earned
only $0.35/share through the first half of the year. Therefore, the market may
remain skeptical surrounding the company's outlook.
Chief Executive John Flannery is keenly focused on reducing costs, divesting assets, and reducing the size of GE Capital's balance sheet. The company announced it would spin off its healthcare business over the next 12-18 months. GE is also merging it transportation business with Wabtec (WAB).
Stepping back, former Executive Jeffery Immelt left the company in a vulnerable place. He exited (NBCU, GE Capital) and entered (Power) businesses at the wrong point in their respective cycles, leaving a debt-burdened conglomerate facing considerable headwinds while sporting exceedingly hairy (convoluted) financial reporting.
Honeywell (HON 153.15, +5.61, +3.80%) had much better news for investors this morning.
Second quarter EPS (+18%) and revenue (+8%) came in above the company's forecast as organic sales grew 6% versus guidance for 3-4% growth.
Chief Executive Darius Adamczyk said growth was "driven by continued strength in Aerospace; demand for Intelligrated warehouse automation solutions; and growth in residential thermal solutions, thermostats and ADI global distribution in our Homes business."
The company saw continued robust short-cycle demand for process automation solutions. Across segments, Connected software sales grew double-digits year-to-date. Meanwhile, long-cycle orders and backlog grew 11% and 14%, respectively.
Honeywell offered third quarter EPS and revenue guidance towards the high end of expectations and raised its outlook for the year. The company expects 2018 EPS of $8.05-8.15, up from $7.85-8.05, and revenue of $43.1-43.6 bln, up from $42.7-43.5 bln. The company impressively raised organic growth to 5-6% from 3-5%.
Honeywell plans to spin off its Transportation Systems business in the third quarter and its Honeywell Homes product portfolio and ADI global distribution business by the end of the year.
Both GE and Honeywell are divesting businesses to create value, but one is clearly doing so from a position of weakness while the other is working from a position of strength.
Honeywell has a $114 bln market capitalization and trades at just under 19x EPS.
GE has a $113 bln market capitalization and trades at ~13x EPS.
P/E ratios can mislead investors who disregard the balance sheet.
GE's enterprise value, including over $115 bln in debt, rises to $250 bln, resulting in an EV/EBITDA multiple over 16x.
Honeywell's balance sheet is pristine in comparison, with modest debt levels, resulting in an EV/EBITDA multiple of 13x.