The beauty of the British Pound

A short reflection on the beauty of the British Pound.

Well, not really on the currency itself: I used to encourage the Brits to actually give up the British Pound and join the Euro, as their economy is closely interrelated with that of the rest of Europe and a joint currency might facilitate trade, but after studying the great works of Nassim Taleb (“The Black Swan”, “Antifragile”) I have become more skeptical about fragile complex systems we do not understand (like the Euro) that might have many unwanted side effects. So let me proclaim myself to be an agnostic on the question whether the Brits should continue to use the British Pound.


Rather, I would like to reflect in this article on the beauty of the British Pound banknotes, in particular the back side of them. Each is graced with a portrait of a great British scholar: the £10 note with Charles Darwin (1809-1882), and the £20 note with Adam Smith (1723-1790). I am disappointed that Smith got to be on the £20 note and Darwin “only” got the £10 note, as I deem the scientific impact and reach of Darwin’s ideas far more noteworthy than those of Smith (even though I studied economics myself, rather than biology). Not only does Adam Smith get to be on a note of higher nominal value, there are also many more £20 notes (1.8 billion) than £10 notes (700 million) in circulation. So who wins the popularity contest? I think neither of them would have cared, if they were still alive. The amusing thing is that Adam Smith was a Scottish economist, the first Scot to appear on an English note.

The beauty of having these two scholars on the British Pound notes is that they teach us a similar concept: Darwin’s discovery of the mechanisms underlying evolution, and Smith’s discovery of the mechanisms of wealth creation. To simplify and summarize matters greatly: one of Darwin’s key propositions is that those organisms that are best adapted to their environment have greater chances of survival, one of Smith’s is that division of labour in manufacturing causes a great increase in the quantity of work that results. In short: adaptation and specialization, concepts that have significant applicability in the area of business strategy, as well as career planning. Are you (and/or your company) working on those things that you are technically competent at, that you enjoy doing, and that pay reasonably well? If so, your earnings potential, your job satisfaction, and “chances of survival” (in a dynamic and turbulent economy, with lots of companies going bankrupt, and jobs under threat of restructuring) are likely to be higher. Those are the questions that I contemplate every time I have British Pound banknotes in my hands. Good triggers for reflection. I am lucky to visit the UK on a regular basis, and use its analogue currency whenever I can. Adam Smith will be around on the £20 note for many more years, as “his” £20 note was issued in 2007 as part of “Series F”. Charles Darwin will sadly be replaced by Jane Austen in 2017 on the £10 note, but has had a long run in circulation since 2000.


What we can learn and predict from GE sharing service margin data

The following table on page 4 of GE’s Q3 earnings release webcast presentation got me very excited as a financial analyst.

GE industrial margins

There’s a lot we can learn and predict about GE’s Industrial margins from this little table. I love puzzles, including “backing up” into a company’s numbers. Here we go….

How much margin does GE make on services and equipment?

If 3Q’14 YTD Operating Margin was 15.1% (of revenue) in total, with services at 30.6%, then we need the split between service and equipment revenue to calculate the equipment margin. The 2013 annual report tells us that the split of industrial revenue is about 28% services and 72% equipment. If we assume a similar revenue split for 3Q’14 YTD, then we can use the weighted average method to back into the equipment margin.

We have an equation with one unknown: Equipment margin * equipment as % of total revenue + Service margin * service as % of total revenue = Total margin. Equipment margin * 72% + 30.6% * 28% = 15.1%. Therefore equipment margin is (only) around 9.1%.

It would get even more interesting if we had service and equipment margins, and the service/equipment revenue split, by business, but understandably GE does not provide this level of detail (you don’t want to give away that level of confidential information to your competitors).

Where will GE’s Industrial OM% be for total year 2014?

GE achieved 15.1% Operating Margins in the Industrial business 3Q’14 YTD, which is up 50 basis points (bps) versus last year’s number must have been 14.6% 3Q’13 YTD. Total year margins in 2013 were 15.7%, i.e. 110 basis points (1.1%-pt) higher than the 3Q’13 YTD number. Q4 is a very high margin quarter for GE, last year @ 18.3%. Last year, around 29% of total year Industrial revenue came in Q4, it therefore also has a disproportionate impact on the total year margin (volume leverage: variable costs go up with revenue, base costs stay fairly flat). If total year margins in 2014 are (like last year) 110 bps higher than 3Q YTD, and/or total year is up 50 bps (like 3Q’14 YTD was), then GE should be able to reach at least 16.2% Industrial OM% for the total year (a nice progression versus 14.8% in 2011, 15.1% in 2012, 15.7% in 2013).

However, the “SG&A (Selling, General and Administrative Expenses) reduction” chart leads me to be more optimistic.


For total year, this estimate (published on October 17, with the Q3 earnings release) says that SG&A will be reduced by around 1.9%-pts for the year (excluding restructuring), gaining even more traction than the Q3 YTD cost-out performance. Furthermore, GE continues to expect a positive value gap (selling price versus purchase price developments) for total year, which helps margins. I am not quite sure of the effect on average margins of the strong Power & Water volume expected in Q4: as a business Power & Water is above average in margins, however equipment is at lower margins than services.

All in all, 80 bps to 100 bps, in other words a total year Industrial OM% of 16.5% to 16.7% might be possible, in my (subjective) opinion. If that turns out to be the case, it might a large positive surprise for investors, and a sign that GE does deliver on key commitments!