Industrial Rev Growth Primed: One Standout Stock
General Electric (GE) remains a vexing stock for investors. It’s technically part of the Industrials Sector, but buy in and you’re getting a third of earnings from GE’s financial service arm. General Electric continues to work on pivoting back to being a purer-play industrial company, but that’s going to take time.
That said, General Electric’s third quarter results suggest there’s a pretty compelling story brewing in the industrial sector. Orders are up sharply amid improving global economic and manufacturing sentiment.
General Electric reported an 18% increase in new orders from U.S. clients. Orders out of Europe rose 17% -- yes, Europe! -- and emerging market orders grew 22%. The amalgamated 19% rise in new orders in the third quarter translates to an extra $6 billion in just one quarter. Total order backlog is now a record $229 billion. Orders within the equipment piece of the puzzle (vs. service) were up 32% compared to the third quarter of 2013.
That’s a pretty strong indication that all the hand wringing about global economic growth may be a bit overdone. A 19% rise in industrial orders isn’t typically associated with recession, or troubling economic stalls ahead. In fact, the Industrial Select Sector SPDR ETF (XLI) has been steaming ahead for the past year:
United Technologies is the rare stock that has been on a tear yet has backed it up with strong enough earnings growth to keep its valuation in check:
In the third quarter United Technologies reported decent revenue growth of 2.8%. But the manufacturer of Otis Elevators, Pratt & Whitney engines and climate control systems (Carrier) hinted at stronger performance going forward as new orders for spare parts in the Pratt & Whitney division rose 17% in the quarter, the climate control division had a 13% rise in new orders and there was a 4% pickup in elevator orders. New orders, then, was the big news from this piece of earnings season.
"With sustained order growth momentum in a majority of our markets this quarter, we continue to expect organic growth to accelerate as we exit the year," Chairman and Chief Executive Louis Chenevert remarked in the company’s official release. Management is delivering on key profitability measures:
And for a company tied to economic cycles, United Technologies has still managed to deliver consistent dividend growth of more than 10% annualized over the past five years. Meanwhile, a steady climb in free cash flow has kept the payout ratio below 30%, giving room for more dividend growth.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.