Foolish Forecast: Ode to GE

Movies, X-rays, trains;
A sprawling worldwide kudzu
Tightening its squeeze

It's National Poetry Month, so there's a haiku in honor of General Electric (NYSE: GE  ) . Donations in that jingly cap by the door, please. Thank you.

The erstwhile King-of-all-trades reports earnings Friday morning, so it's time to size up its place in the world of business.

What analysts say:

  • Buy, sell, or waffle? Twenty Wall Street analysts follow GE nowadays, with 17 of them rating the stock a buy and the other three holding. In our Motley Fool CAPS investor community, it's a three-star stock on the backs of over 2,500 player ratings.
  • Revenues. $39.8 billion should satisfy the average forecast, up 5.2% over last year's $37.8 billion.
  • Earnings. Management guidance points to a $0.43-$0.45 range of earnings per share, and none of the analysts has strayed from those numbers. Last year, GE churned out $0.39 per share.

What management says:
In the latest quarterly report, CEO Jeff Immelt noted that most of the company's diverse segments performed well, with one notable exception: "NBC Universal's turnaround is advancing and Industrial had a good year in spite of continued commodity inflation and competitive challenges at Plastics." Of course, management is now looking for a buyer for the troubled division. The GE philosophy is still focused on excellence in every market, with no qualms about cutting loose the underperformers.

In the annual letter to shareholders, you'll also find this genuinely Foolish tidbit: "Consistent earnings and cash flow growth, with expanding returns, increase shareowner value. This is a long-term investment. There are no short-term tricks."

What management does:
On that note, these margin trends don't seem to jibe very well with the corporate philosophy. However, the dollar amounts have increased on nearly every level. The 2006 fiscal year saw 10% higher revenues than 2005, and 10.7% more earnings. If the analyst prognostications are correct, earnings should grow faster than revenues, which translates to better net margins.

As for cash flows, the third-quarter 2005 haul of $10 billion in free cash flow recently dropped off the trailing-twelve-month window, but an average FCF around $3.5 billion per quarter isn't too shabby, either.

Margins

9/2005

12/2005

3/2006

6/2006

9/2006

12/2006

Gross

40.9%

39.8%

38.8%

39.0%

38.1%

38.3%

Operating

17.2%

16.1%

15.7%

16.0%

15.4%

15.3%

Net

14.9%

11.5%

11.2%

11.3%

11.0%

13.0%

FCF/Revenue

19.5%

16.0%

13.0%

12.0%

9.0%

8.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
It's nearly impossible to talk about GE as an investment without breaking the complex beast down into its various parts. The media segment is digging for consumer and advertising cash in direct competition with the likes of Disney (NYSE: DIS  ) and Viacom (NYSE: VIA  ) ; it's a media magnet in its own right, and NBC probably receives more coverage than its 11% of GE's operational earnings would merit.

The health-care division is about as large and prolific as media, though a tad more predictable. But the real money makers are financial services and manufacturing operations, each of which is so huge that GE reports their results as several segments each.

Other multinational behemoths crowd these markets, like ABB (NYSE: ABB  ) and Siemens AG on the industrial side, or American Express (NYSE: AXP  ) and American International Group (NYSE: AIG  ) in financial services. The spotlight NBC attracts is anathema to these operations, as they simply and silently churn out billions of dollars in operating profits, quarter after quarter, year after year.

This stable operational base gives GE one of the strongest non-bank credit ratings on the market and enormous financial flexibility. In other words, the company is primed to pounce on any sector that management thinks it can dominate -- or wrangle attractive terms for any division sales that might occur, like plastics.

Getting a true handle on such a multifaceted operation is way beyond the scope of this snapshot, but perhaps your appetite for independent research has been whetted. Suffice it to say that whatever this earnings report may contain, GE's vine isn't about to wither anytime soon.

Walt Disney is a Motley Fool Stock Advisor recommendation. What's more, the majority of the companies mentioned in this article are four-star CAPS stocks, and none is rated lower then three stars. Sign up for a free Motley Fool CAPS account today and explore the tough competition that GE is up against.

Fool contributor Anders Bylund is a Disney shareholder, but holds no other position in any of the companies discussed here. He does watch a lot of TV, though. You can check out Anders' holdings if you like, and Foolish disclosure is everywhere, all the time.


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