General Electric Flips the Switch

You say Alcoa is a leading indicator? Intel's got the best clues for tech performance? JPMorgan tells us the health of the banking industry? Perhaps, but if you ask me, there's no better proxy for the U.S. economy in general, and for its stock market, than General Electric (NYSE: GE  ) , which reports earnings tomorrow. But can GE bring good things to earnings season?

What analysts say:

  • Buy, sell, or waffle? Blue Horseshoe loves GE. Out of the 16 analysts expressing an opinion on the stock, 10 say they'd buy it today. GE has a half-dozen holds, but nary a "sell" rating.
  • Revenue. Yet for all the positive thinking, these analysts don't expect GE to report any revenue growth whatsoever tomorrow; actually, they're looking for a 0.4% downtick to $37.67 billion.
  • Earnings. On the other hand, profits could come in at $0.27 a share, up from $0.22 last year.

What management says:
A nickel's worth of growth? That hardly seems enough for a company that, up until the Great Recession at least, regularly vied with the likes of Wal-Mart (NYSE: WMT  ) and ExxonMobil (NYSE: XOM  ) for the title of "largest market cap on the planet." But GE management has big plans to improve that number.

Last week, the company announced a return to "playing offense." It's buying $1.6 billion worth of Citigroup (NYSE: C  ) credit card debt. GE's also spending $3 billion to buy oil-and-gas equipment maker Dresser out of private equity hands, bringing the company into competition against the likes of Halliburton (NYSE: HAL  ) , Schlumberger (NYSE: SLB  ) , and Tyco (NYSE: TYC  ) in the energy and valves sphere. And that's only the beginning. GE says it plans to spend as much as $30 billion on similar acquisitions over the next two to three years.

What management does:
That's a massive influx of new revenue streams -- producing earnings at what could be pretty good margins. Although the company's net remains burdened by asset writedowns and losses from discontinued operations, gross and operating margins are on a pronounced uptrend:

Margins 03/09 06/09 09/09 12/09 03/10 06/10
Gross 31.7% 31.3% 30.5% 31.5% 33.2% 36.4%
Operating 7.4% 8.5% 5.7% 7.6% 8.3% 12.3%
Net 7.4% 6.9% 6.6% 7.3% 5.3% 8.3%

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:
Last month, Citigroup upgraded GE shares in a report that spoke glowingly of the company's GE Capital division -- the same division that's been writing down assets all through the Great Recession. The same division to which Citigroup just sold $1.6 billion worth of credit card receivables. According to Citi, GE Capital's so cool, it's going to grow earnings 50% next year, driving profits growth for the rest of the company.

I'm not saying there was a quid pro quo going on here, because GE is clearly gaining strength, but the praise seemed effusive to me. We will find out tomorrow and in the coming quarters whether Citi's faith in GE Capital was dead-on or misplaced.

Fool contributor Rich Smith does not own shares of any company named above. Intel and Wal-Mart Stores are Motley Fool Inside Value picks. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of ExxonMobil, Intel, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 14, 2010, at 10:37 PM, kdt34wqx wrote:

    At $17 per share, GE has lost $477 billion of shareholder’s equity since 1999 (73% of its value), including $265 billion (60%) since its collapse in 2007. GE has also lost $29 billion of shareholder’s value (about 14%) since its high of $19.70 in April of 2010. That’s what GE is about.

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