General Electric Earnings Preview: GE Capital And Revenue Growth Still Matter

Oct.17.12 | About: General Electric (GE)

General Electric (NYSE:GE), the flagship blue-chip stock from the 1980s and 1990s bull market rally, reports Q3 2012 financial results Friday, Oct. 19 before the bell.

Analyst consensus is expecting $0.36 in earnings per share on $36.87 billion in revenues for year-over-year growth of 16% for earnings per share on 4% revenue growth. GE topped out at $60 per share in August 2000, and hasn't been back close to that level since. GE Capital was decimated during the 2008-09 mortgage crisis, and since then GE hasn't been able to put up any sustainable business growth.

However, GE's stock is up 26% year to date (not including the dividends) as large-cap and mega-cap stocks are starting to be viewed as safe havens. The fact is that, despite tepid revenue growth, earnings per share growth is starting to tip into the low to mid-teens for the foreseeable future.

Here is a history of GE's year-over-year earnings per share (first column) and revenue growth (second column) over the last 10 years, along with estimates for the next three years:

2014 +13% (est) 6% (est)

2013 +12% (est) 4% "

2012 +12% (est) 1% "

2011 +19% -2%

2010 +12% -4%

2009 -42% -14%

2008 -19% 6%

2007 +11% 6%

2006 +16% 9%

2005 +8% -2%

2004 +3% +14%

2003 +3% +2%

2002 7% +5%

Despite the two tsunami's GE experienced with 9/11 and then the 2008-09 recession, the company can still generate earnings growth in environments where revenue growth is tough to come by.

Last quarter, overall GE reported flat revenues and 12%-plus earnings growth, with GE Capital revenues falling 8%, even though GE Capital operating profit rose 31%. Despite GE stating that it wants to shrink GE Capital as a percentage of total GE, the fact is GE Capital revenues are still 31% of revenues and 36% of operating profit. Industrial segment earnings rose 10% organically in Q2 2012.

The fact is that GE Capital still matters to GE, and likely will for a while and that could be a positive now. Look for continued improvement in GE Capital in Q3 2012, as the tailwinds that we are seeing in other financial companies, particularly an improvement in real estate, will help GE.

One thing that does worry me is that, according to our internal spreadsheet, GE has missed revenue estimates and fallen short 10 of the last 15 quarters. I think analysts are struggling with modeling GE's businesses in the "new normal" of today's slow growth economies.

This is a tough company to succinctly analyze given the breadth of its operations and company size. That said, GE is still generating about $2.70 in operating cash flow and plenty of free cash. The stock is trading at about seven times cash flow per share and sports a 8% free cash flow yield, with analysts expecting mid-teens earnings growth for the next three years.

Ultimately, I'd like to see GE generate better than mid-single-digit revenue growth, but it may take a return to better global growth to do it. Given what the company has survived in the last 11-12 years we are comfortable keeping it as a 1%-2% position in client accounts, earning the dividend and awaiting better markets.

We treat GE as part industrial, part financial in client accounts, given the GE Capital presence. A pullback under $20 would be a good point to add more.

Click to enlarge

Disclosure: I am long GE, and looking to own more GE on a pullback. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.