GE's Results Are a Black Eye for Bulls

As Goldman Sachs' chief U.S. equity strategist rightly pointed out in a client note last week: "As investors attempt to gauge the depth of final demand in the economy, market focus will shift to top-line results. Firms will have to report strong [third-quarter] revenue and positive top-line surprises ... for equities to resume their upward trajectory." In that context, third-quarter results from the granddaddy of bellwether companies -- General Electric (NYSE: GE  ) -- were hardly reassuring for investors who are banking on the stock rally to continue.

Bottom line: mixed
Earnings from continuing operations came in at $0.22 per share, $0.02 ahead of the analyst consensus figure. Not surprisingly, GE's lending arm was the worst drag on performance, with an 87% year-on-year drop in profits. The standout segments were Energy Infrastructure (+11%) and NBC Universal (+13%).

Top line: unambiguous
However, the top line clearly highlights a weak economy, with every company segment recording a year-on-year revenue decline; the best performer, Energy Infrastructure, experienced a 9% drop. All in, GE's revenues fell 20%, missing the consensus estimate by 4%. These numbers point to a U.S. economy that is still struggling mightily, and they are consistent with many companies' experiences.

Indeed, of the 131 firms in the S&P 500 that have reported fiscal-third-quarter results, 57% missed their consensus revenue forecast, including bellwether companies such as:

Company

Q3 Revenue Miss (Actual vs. Consensus Estimate)

Q3 Revenue Miss
(Actual vs. Low Estimate)

Air Products & Chemicals (NYSE: APD  )

(7.5%)

(4.8%)

Dell (Nasdaq: DELL  )

(6.8%)

(1.3%)

FedEx (NYSE: FDX  )

(6.3%)

(1.4%)

Campbell Soup (NYSE: CPB  )

(6.0%)

(0.8%)

Microsoft (Nasdaq: MSFT  )

(3.2%)

0.4%

Procter & Gamble (NYSE: PG  )

(2.4%)

0.0%

Source: Author's calculation based on data from Capital IQ, a division of Standard & Poor's.

Note that the table contains cyclical stocks (Air Products, Dell, FedEx, and Microsoft) and defensive stocks (Campbell Soup and P&G), and that four of the six companies missed even the lowest analyst estimate.

GE and the market rally
I have written multiple times in these columns that the market's current valuation implies a robust recovery for which there is scant evidence. Don't look for it in GE's earnings report -- it isn't there.

As we emerge from the recession, this is exactly the time to buy these stocks.

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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. FedEx is a Motley Fool Stock Advisor recommendation. Dell and Microsoft are Motley Fool Inside Value selections. Air Products & Chemicals and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


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  • Report this Comment On October 16, 2009, at 6:42 PM, KKS53 wrote:

    Alex -

    I think you are making a mistake by continuing to use GE (which as you point out has long been the granddaddy of bellwethers) as a current gauge of the strength of the US economy coming out of a deep recession. GE is a shadow of its former self and is also not the company that Jack Welch left in the earlier part of the decade. To say at this point that Immelt and his management team haven failed to execute and deliver the kind of perfomance GE was known for under Welch would not be too off the mark. I would argue today that a few other conglomerates - United Technologies being at the top of the list - are probably much better gauges of broad economic activity and their results will give us a much better read on the strength of the current recovery. UXT's results are not tainted by the uniquely complicated and specific issues/challenges being faced by GE. I would also put the technological bellweathers of our time - Cisco and Intel - ahead of GE as they are both leading indicators of economic activity and are so dominant in their respective areas that their experience and observations can be viewed as good proxy for economic activity and trend. We already know what INTC did and ther awesome results - top line and bottom - was very much in line with the beginnings of a pretty robust - albeit slowly developing - recovery starting to take hold. Now let's see what UTX has to say next week followed by CSCO and we'll have a much better sense for where we are headed ...

    More on GE though. The company has been underperforming for a few years now - not just the past several quarters - and is no where near the economic bellweather that it once was. GE Capital (Finance) accounts for almost 50% of the company's total revenue and the performance of this unit is likely to weigh down on the company for years. Anyone who is familiar with GE Capital - the businesses they have pursued and more importantly the assets they hold on balance sheet (particularly in terms of residential and commercial real estate exposure) can appreciate the pain that is currently being experienced in Fairfield, CT. And remember that GE isn't a regulated bank holding company which means that they were able to take risks that most regulated institutions would generally not have been able to take.

    GE's infrastructure/energy group along with its industrial businesses are top notch and best in class - once they are untangled from GE Capital's web, you will again have a true economic and GLOBAL bellwether that would make the premise of your article more palatable. At this point though, GE's results don't tell you that much about anything.

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