General Electric (GE) is due to report earnings before the market opens Friday October 19th. GE is a blue chip conglomerate known for making everything from airplane engines and locomotives to light bulbs, and home appliances. The company operates across virtually all market segments, providing energy services, healthcare services, transportation products and services, household appliances, through GE Capital provides commercial and personal lending, and much more. It seems everywhere you turn GE is providing infrastructure, technology, service, or financing to support businesses all over the world. Whether investors own shares of GE or not, due to the global exposure of GE to all aspects of the economy, they will likely be watching the earnings report closely to get a sense of the overall direction of the markets and global economy.
Top and Bottom Line Numbers
The headline numbers coming from the GE earnings report will obviously be important. Analyst estimates currently see earnings per share for GE coming in at $0.36 for Q3 2012 on $36.9 billion in revenue. If GE is able to match these estimates, earnings per share would have risen roughly 16% year on year while revenue increased 4.2%. GE has a history of surprising to the high side with earnings, having exceeded analyst estimates in three of the past five quarters. Another earnings beat on Friday could be a catalyst that would drive the stock and the markets higher.
Beyond simply the top and bottom line numbers, investors should look to see how margins for GE have improved (or deteriorated) over the past quarter. In the Q2 earnings call GE CEO Jeffrey Immelt said "…Margins are improving and we are on track for margin growth starting in the third quarter for 2012 and 2013."
GE has focused its business over the last few years, putting more emphasis on higher margin industrials and higher growth market segments like energy infrastructure. GE expects to see double digit growth within its industrial business, and as growth within industrials continues GE should see margins improve. With this renewed focus, it is now time for investors to see the prediction of higher margins come to light. GE expects to see margins improve 30-50 basis points during 2012, and roughly 100 basis points between 2012 and 2013. If GE sees margin improvement that goes beyond what analysts have expected, shares could get a boost as the company's will have shown that the focus management has placed on industrials is paying off; however, if margins remain flat or deteriorate shares could pull back and create an opportunity for investors to add or initiate positions in GE.
GE had to cut its dividend at the height of the housing crisis due to the devastating effect of the recession on the GE Capital unit. At the time GE Capital was contributing nearly 70% of the company's earnings. GE has refined its business model to focus on industrials, and now GE Capital supports the operations rather than leading the company. GE Capital now contributes roughly 30% of the company's revenue, and GE Capital has begun to pay a dividend back to the parent company. In Q2, commercial real estate showed significant improvement, and real estate as a whole (commercial and residential) are likely to continue improving as delinquencies decrease. Investors will be looking to see continued improvement in GE Capital's assets and continued profitability in the real estate business. As long as GE Capital shows it has not deteriorated, investors should be happy with results from the unit. GE anticipates seeing mid-single digit growth within GE Capital for 2012, and the immediate future. If the unit is able to produce growth that meets expectations GE will likely continue to march higher, as the business unit which presented the greatest challenge to the company in recent years continues to show stability and increasing strength. If GE Capital falters, the stock will likely pull back to near $22.25 in the coming weeks, and at that price, investors could buy in for long term gains and healthy dividends.
GE is a global stock and in many ways can be a fantastic indicator of the overall economy. With exposure across all market sectors and operations around the world, GE management truly has the visibility to see how the global economy is performing. If GE is able to re-affirm or increase guidance, this would give investors some confidence that the global economy, while growing slowly, will continue to grow in the quarters ahead. If however management were to issue soft guidance, the markets will likely pull back, as this would indicate a continued slowdown of the global economy.
GE investors will be looking for other insight from management, and these things may or may not be addressed during the earnings call. Obviously GE investors love their dividends, and would love to see management announce a dividend raise. While an increase is likely coming, it is more likely that management will announce the increase during the December investor outlook meeting. However, if GE were to announce a dividend increase early investors may see that as a sign of strength, and that announcement could drive the stock up further in the near term. Additionally, GE management may address the impact of the Boeing (BA) Dreamliner/GEnx engine issues following the recent equipment failures where material defects were found in the fan shaft of the GEnx engines. GE has also made news in recent weeks with chatter that the company may look to make acquisitions within the mining industry. Management may provide some additional insight into the potential acquisitions and the strategy regarding them during the earnings call.
GE is a global economic bellwether stock. Investors in all areas of the market will tune in to the GE earnings report to not only see how the company has performed, but how it expects GE and the economy to perform in the quarters and years ahead. GE has performed well this year, seeing its share price increase nearly 28%. While the stock has performed well, positive earnings and outlook would drive the stock higher. If earnings or future guidance fall short of expectations, shares will pull back, and investors could get this blue chip at a discount.
If GE were to fall below $22.25 I would strongly consider initiating or increasing a position with GE. The stock trades with a TTM P/E ratio of 18.5, and the company expects EPS growth of 12% for the next five years. GE pays an annual dividend of $0.68 which equates to a 3% yield at today's price, and pays out roughly half of earnings as dividends. While GE has performed strongly this year, I believe the stock has more room to grow. As the GE Capital continues to strengthen and the global economy stabilizes, GE shares stand to outperform.
Stay tuned for a follow up article analyzing the results and information provided during the GE earnings call