Will Tech Gleam Amid the Market Gloom?

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Includes: EBAY, GE, INTC
by: Shlomi Cohen

The well-known axiom among Wall Street's elders is that what's good for General Electric Co. (NYSE:GE) is good for America, but this wasn't enough last Friday, even though GE's quarterly report was in line with expectations and contained not a hint of global recession, given that the country's confidence in the banking sector is buckling fast.

Nor did the strong report from another industrial concern, aluminum giant Alcoa Inc. (NYSE:AA) have any effect on the lagging stock markets. This tells us that a potential slide into a severe recession is of less concern to investors these days, as fears grow over the stability of the broader financial sector.

GE's results aroused considerable interest, not just because it is a global economic barometer, but because the first quarterly miss - the first such miss for a great many years - brought to the surface the strained relations between the company's legendary CEO Jack Welch and his successor Jeff Immelt. The shock miss in April found Welch in the studio of CNBC television where he was commentating on the latest round of results, and he duly seized the opportunity to attack his successor for the first time since stepping down. "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now," said Welch. "Jeff has a credibility issue."

The following day, amid a welter of criticism over his unfortunate remarks, Welch apologized and said there was nothing he loathed more than former CEOs, who round on their incumbent successors, and also took the opportunity to defend the business model that Immelt has been leading. Immelt, for his part, avoided responding to Welch's tirade directly, but merely accepted responsibility for the miss and assured investors that they were uppermost in his concerns, and that it would be not be repeated. He duly delivered last Friday and has been spared Welch's hunting spree for the time being.

Getting back to the report itself, GE posted 9% growth across all its segments in the sector, with the conglomerate's projects and products in the infrastructure sector providing the main growth drivers, with 15-20% growth, amounting to 37% of total sales. (Call Transcript)

Naturally, this growth was generated almost entirely by the company's businesses in emerging markets, principally its transport, energy, electricity, and water projects, with the total orders backlog rising 29% since the beginning of 2008 to $50 billion.

The projected downturn in the aviation industry, which will hit GE's jet division, has been swallowed up in the tremendous growth in its various energy segments, including alternative energies such as, for example, the massive investment now underway in wind energy farms on land and at sea.

As for its financing arm, GE Capital, the harm it suffered was relatively small for sits size - a loss of just $23 million, a tenth of the loss in the preceding quarter. There were those who feared that in the current report, it would "drop the other shoe", and announce the need for a massive fund raising drive, but GE moved to reassure investors when it announced in its conference call, that it had no need for further funding to maintain its financing arm's high AAA rating.

The expectations of technology companies have clearly gone through the floor, although I believe there will be the odd surprise here and there, since most of them have 50-70% of their sales outside of the US. In an update to investors on the first tech giant to step to the plate, Intel Corporation (NASDAQ:INTC), Goldman Sachs says that at its current price of $20.60, a potential miss by the company has already been priced in, and therefore should the results the company is due to unveil later today be in line with both market expectations and its own guidance, they will send the share north, subject to the overall stability prevailing on the market tomorrow.

Intel is expected to report sales in excess of $9 billion for the second quarter with earnings per share of $0.25, and the company is likely to predict earnings per share of $0.34 on more than $10 billion sales in its guidance for the third quarter. Investors will be focusing this time on the company's gross profit, which is likely to show an improvement over the preceding quarter, despite the spiraling losses on the flash partnership with Micron Technology (NASDAQ:MU). Intel's gross margins are believed to be likely to show an improvement, due to, among other things, increased sales of server microprocessors as well as the fact that 45% of the microprocessors it sells are to the laptop market, two niches where its profit margins are extremely high.

Can eBay be considered a defensive stock against recession?

Another of the big stocks in my portfolio tracked by "Globes", eBay Inc. (NASDAQ:EBAY), will unveil its results tomorrow after the bell. This will be the company's first quarter under the leadership of its new CEO John Donahoe, who replaced Meg Whitman three months ago. Whitman has been lauded for turning eBay into a e-commerce powerhouse within a decade with market cap of $40 billion. If the Republican presidential candidate John McCain wins the election in November, Whitman is likely to be offered a senior economic position within the McCain administration, and in the meantime she is heading McCain's economic policy team.

eBay is expected to report second quarter sales of $2.2 billion and earnings per share of $0.41. It is considered an interesting investment, especially at this point in time with the clouds of recession looming large on the horizon, since it is believed that an increasing number of people throughout the world who have either lost their livelihood or are at risk of losing it, will be seeking to earn some extra income through e-commerce, a field in which eBay is the leader in most countries worldwide. 53% of sales made through it are outside the US, with this portion yielding annual growth of more than 30%, double its growth in US sales.

Analysts at Citi, Bank of America, and Morgan Stanley have all upgraded their ratings for eBay ahead of its results. They believe that the company will show a slight improvement in its results for the second quarter, and they therefore expect its results to be slightly above the market consensus.

Over in the Internet search engine sector, Yahoo Inc. (YHOO) will probably continue to suffer from defending against repeated takeover attempts by Microsoft Corp. (NASDAQ:MSFT), while Google Inc. (NASDAQ:GOOG) is on course to become a virtual monopoly, and it would not surprise me if the market discovers one day that eBay could also be an interesting takeover target for anyone seeking to gain a firm foothold in the e-commerce sector. If eBay does indeed become the focus of a takeover battle, at least any haggling will be over the price alone, without any of the bruising ego battles such as the one between Steve Ballmer and Jerry Yang.

Disclosure: None

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.