General Electric's return to its roots as an industrial company continues to proceed unevenly.
The industrial and financial giant said Friday that sales of industrial equipment - everything from wind turbines to jet engines to locomotives - lagged in the third quarter. Revenue of $35.9 billion was about $1.7 billion shy of Wall Street estimates and investors drove the stock down 5 percent.
GE has been de-emphasizing its finance unit, GE Capital, which accounted for more than half of GE's profit in 2006 during a boom in financial services, but recorded billions in write-offs when the economy went into recession. Instead, it's focusing on making products ranging from wind and natural gas turbines to sonogram machines to energy-efficient appliances.
So far the results are mixed. While GE has struggled to grow sales, its order book is showing signs of life.
CEO Jeffrey Immelt said both equipment and service orders increased for the first time in two years. That led him to forecast better results and increased dividends in 2011.
Immelt told analysts that he sees "a slow recovery in a few areas" of GE's diverse industrial operations. GE has been looking to grow its core businesses of energy infrastructure, health care and aerospace and Immelt said GE will continue to search for acquisitions.
Overall, the Fairfield, Conn. company said third-quarter income fell 18 percent, mainly because a Japanese finance division required additional cash reserves. GE reported net income of $2.06 billion, or 18 cents per share for the quarter ended Sept. 30. That compares with earnings of $2.49 billion, or 23 cents per share, a year ago.
Excluding the $1.1 billion in reserves added to the Japan business, GE earned 29 cents per share, 2 cents above Wall Street estimates, according to a survey of analysts by Thomson Reuters.
Shares fell 86 cents, or 5 percent, at $16.30.
Peter Sorrentino, an analyst with Huntington Asset Advisors, said he was surprised by the drop in third-quarter sales. U.S. manufacturers have seen a more modest pace of growth lately, following a jump in activity coming out of the recession as companies replenished inventories. GE's results suggest U.S. manufacturing may sag even further, Sorrentino said.
"We thought the economy would soften to 2 percent growth in the second half of the year," Sorrentino said. "It may be worse than that."
GE said NBC Universal and its technology infrastructure businesses suffered double-digit profit declines. The technology business includes the division that makes locomotives. Major railroads put thousands of locomotives in storage during the recession as traffic on their lines fell dramatically. While many of those are back on the tracks, demand for new ones has been weak. The company's jet engine business also had lower sales and profits, and wind turbine sales dropped 32 percent, or $600 million.
"The wind market has really collapsed in the U.S.," Chief Financial Officer Keith Sherin said.
The company's health care business was the only industrial division with a significant profit increase - 14 percent. GE makes diagnostic products such as sonograms and MRI machines for doctors' offices and hospitals,
GE Capital saw a year-over-year profit increase to $871 million from $141 million, a result of lower credit costs and higher margins, partially offset by fewer assets and higher impairments in the quarter.
GE expects revenues in its industrial division to be flat in the final three months of the year, and its overall order backlog remained steady at $172 billion. But Immelt said that higher equipment and service orders would help drive company profits next year.
"Third-quarter 2010 results should give investors confidence that a renewed GE should grow earnings and dividends in 2011 and beyond," Immelt said.
The company will continue to realign its diverse business. It's selling the company's majority stake in NBC Universal to Comcast for about $14 billion. And earlier this month, GE said it would expand its energy business with a $3 billion acquisition of energy equipment maker Dresser Inc.
Sorrentino said GE should look for similar acquisitions that focus on the industrial side.
"That's what we look to GE for," he said. "They've said they want to focus on innovation, technological superiority, and we'd like them to see that carry through."