July 17, 2015 / 8:00 PM / 2 years ago

Cost controls buoy GE, Honeywell amid economic pressures

3 Min Read

The logo of General Electric is pictured at the 26th World Gas Conference in Paris, France, June 2, 2015.Benoit Tessier

(Reuters) - General Electric Co (GE.N) and Honeywell International Inc (HON.N) beat expectations for their latest quarterly results on Friday as ongoing cost-cutting efforts paid off with profit margin increases that impressed Wall Street analysts.

At a time multinational industrial manufacturers face pressure from foreign currency swings and weak oil and gas markets, GE and Honeywell also showed the benefits of being diversified with pockets of strength in areas such as aerospace.

"Any multinational company in this environment is seeing very little organic revenue growth and revenue growth declines when you account for currency weakness," said Jim Corridore, an equity analyst at S&P Capital IQ. "So you have to find a way to offset that."

GE shares were up 0.9 percent and Honeywell shares rose 1.7 percent in afternoon trade, outperforming U.S. markets, which weakened slightly.

Wall Street was encouraged that both companies posted revenue increases excluding currency swings: 5 percent for GE and 3 percent for Honeywell.

But the companies also demonstrated they could wring more profits from those sales. GE's industrial profit margin expanded to 16.2 percent from 15.5 percent a year ago, while Honeywell's margin rose to 18.4 percent from 16.7 percent.

GE's total costs and expenses were flat compared with a year ago, despite a 1.5 percent sales increase.

After focusing on sales and administrative costs, GE more recently started a drive to increase gross product margins. That includes driving down material prices and becoming more efficient with manufacturing operations, GE Chief Financial Officer Jeff Bornstein said in an interview.

"What we are trying to get is more output for the same or less cost, and on a product-specific basis how do we have the most cost-competitive products in the world," he said.

Bornstein said GE was ahead of its plan to remove $600 million in costs this year for its oil and gas division. Indeed, even though GE's oil revenue slumped 15 percent, the division's operating profit fell by a less-severe 12 percent.

"When things are getting more competitive, your ability to get costs out of your product or your services is absolutely critical," he said.

In an example of Honeywell seeking more efficiency, Chief Financial Officer Tom Szlosek said it is examining ways to design products that require less material or fewer components.

"I wouldn’t say that we’re out to cut costs," Szlosek said in an interview. "We’re out to operate our enterprise more efficiently, and in a more economic way."

Reporting by Lewis Krauskopf; Editing by Peter Galloway

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