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GE Earnings: The Battle Between Margins and Financial Engineering

NEW YORK (TheStreet) -- GE (GE) is one of those market behemoths that defies the idea that earnings is a needle-moving event.

Think Big Oil stocks like Exxon Mobil (XOM), or more generally big name stocks that tend to trade in a range for extended periods, and take longer to break out of those ranges than any one earnings report can accomplish, even if their meet, miss or beat of the bottom line gets plenty of headline attention.

When it comes to GE specifically, earnings is a battle between operating margins in the core industrial businesses, and the legacy of GE Capital.

It's been many quarters in a row now that investors have been left in limbo when it comes to the margin story for several key businesses, such as natural gas and wind turbines.

"We're almost at the exact same spot as we've been," said Morningstar analyst Daniel Holland. "They pitched margins as being strong this year on the back of not so robust growth. I expect to hear wind margins are getting better after bottoming out," the analyst said. The discussion of the bottoming in wind margins has lasted for more than a year, though. "Industrial margins last year were low for them," Holland said, down in all four of the core industrial businesses.

Holland takes the long view. "Strong top line growth quarter over quarter and operating margin improvement are good things, but are not the things that get me most excited."

Its GE's positioning in energy, health care, and aerospace, for example, and the growth expectations for these business and key geographic expansion into emerging markets, that will allow the rest of the financials to fall into line. "Over time, the trend in margins should be solid," Holland said, even if the short-term outlook remains cloudy.

Jack de Gan, principal and senior advisor at investment manager Harbor Advisory, said the impact of emerging markets expansion on growth should help to counter what will be lackluster global growth for GE on slowly improving margins. In a March presentation, GE officials said they expect margins to grow by 50 basis points per year for the next three years, which would bring the recently underperforming margins to a healthy level of 16.5% to 17%.

GE shares may decline if operating margins are not improved in the quarter -- as has happened in the recent past -- but a decline in GE shares from the top-end of its recent trading range wouldn't be near a panic situation, and might not even last the length of a trading session. The 52-week range for GE shares is roughly $14 to $21 and the stock is in the $19 range ahead of earnings, leaving some room for an initial knee-jerk reaction to the downside.

Stock quotes in this article: GE 

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