General Electric: Earnings Preview

General Electric is set to report its fourth-quarter results early Friday. Investors will be looking for details on its Capital Finance unit and capital deployment plans in addition to the actual numbers.
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NEW YORK (

TheStreet

) --

General Electric

(GE) - Get Report

is slated to report its fourth-quarter results early Friday morning, and judging by the trend established so far in fiscal 2009, the company looks like a good bet to modestly top Wall Street expectations on the bottom line while disappointing on the top.

That's been the pattern for the first three quarters of the year. Averaging out the numbers, GE has beat the prevailing analysts' view for its earnings per share by an average of 3 cents a share on a quarterly basis but still managed to come in roughly $2 billion short on revenue each time.

A hitch in relying on this trend to continue, however, is that the company held a pair of investor meetings in December, providing some color on the quarter as well as an indication of where it sees performance heading in 2010. That means the estimates out there now may be a bit more honed in on current conditions at GE than ones in the past.

If that's the case, Wall Street may be less likely to be distracted by a profit surprise, and the stock's subsequent reaction could hinge on more directly on credit quality, as the progress the company makes with troubled assets housed in its Capital Finance unit, representing roughly 30% of overall revenue, is still the main overhang for the shares.

The current consensus view of analysts polled by

Thomson Reuters

is for General Electric to post a profit of 26 cents a share in the December period on revenue of $40.02 billion. That performance would be up from earnings of 22 cents a share on revenue of $37.8 billion in the third quarter, but represent a decline from earnings of 46 cents a share on revenue of $46.21 billion in the same period a year earlier.

Earnings

:

In light of the relatively recent investor meetings, UBS is expecting investors to be "largely focused on the details" of the fourth-quarter results, and the firm listed the usual suspects since the credit crisis kicked in -- delinquency and non-performing loan rates and the level of provisioning and loan loss reserves within GE's finance unit -- as the areas meriting particular attention.

"We don't expect any major surprises at Capital Finance this quarter; however, we remain concerned that consensus expectations regarding the duration and severity of the credit cycle may be optimistic, and that long-term normalized earnings at finance may fall short of expectations," UBS said in its research note.

The firm, which has a neutral rating with a $17 price target on GE's stock, pegged the key areas of focus in the company's industrial businesses as "incoming order rates, backlog levels and pricing" and said it expects GE to post a profit of 25 cents a share, a penny light.

Citigroup Global Markets, the company's equity research arm, also previewed GE's quarter earlier this week, saying it expects "difficult conditions to persist across the portfolio" and that it believes the recent outlook meeting -- where the company indicated expectations for earnings of around a $1 per share for fiscal 2010 -- raised questions about fiscal 2011.

"We had anticipated a clearer picture of growth for 2011 but management focused on 2012 upside instead," stated the firm, which has a hold/medium risk rating on the stock with a $15 price target. Citigroup is expecting an in-line profit performance from GE for the fourth quarter, and will be listening closely for further insight on next year.

"Although not explicit, we suspect GE is indicating 2011 could be a less than robust year for growth as well," the firm said.

Revenue

:

Because of its conglomerate status, it's difficult to make any sweeping statements about General Electric's revenue prospects, which is undoubtedly a factor in why the estimates and the actual numbers rarely seem to match up. There are myriad moving parts, and it's a stretch to draw lines between any of the different businesses or else use even well-founded assumptions about individual areas to draw conclusions about the whole.

Citigroup waded in though, breaking down its expectations for individual businesses. The firm expects GE's pattern of coming up short on revenue to hold, as it's predicting a total of $37.72 billion.

Compared to a year-ago, Citigroup sees weakness across the board in the company's Technology Infrastructure division with revenue falling roughly $800 million year-over-year in the Aviation business, and $700 million for its Healthcare operations, for example. Within the Energy Infrastructure division, Citigroup is forecasting a revenue decline of nearly 18% to $9.45 billion from a total of $11.41 billion in the same period a year earlier.

For GE's Capital Finance unit, Citigroup expects a sharp decline in revenue from commercial lending and leasing activities to drive a 25% decline from a year ago to revenue of $11.14 billion.

For its part, UBS also sees an overall miss on revenue for General Electric, as it's forecasting a total of $39.04 billion.

Stock Performance

:

General Electric's stock has started 2010 off with a bang after a disappointing decline in 2009. Through Wednesday's close it was up 9.1% year-to-date but that merely brings the shares back to the plus $16 levels they enjoyed at this time last year.

While GE experienced similar volatility to that which gripped the financials in 2009 because of its hefty Capital Finance unit -- falling below $6 in early March -- its impressive rebound wasn't enough to keep pace with the broad equity indexes typically used as the benchmarks for blue chips. For example, while GE was down roughly 7% in 2009 when adjusted for dividend payouts, the S&P 500 appreciated nearly 24%.

The stock closed Thursday down 3% at $16.02 ahead of the earnings report with the markets -- especially the big banks -- rattled by President Obama's proposal to limit the size of banks and some of their risk-taking abilities. Volume was 98.6 million, well above the issue's trailing three-month daily average of 75.1 million.

Sentiment towards the stock on Wall Street can only be characterized as mixed. Of the 16 analysts covering the company, the breakdown was surprisingly even among bulls and bears. Indeed, according to

Thomson Reuters

, six analysts are at buy vs. another six at hold, while two analysts are at strong buy vs. two others at sell. Nice symmetry there. The median 12-month price target for the stock, reflecting input from 13 analysts, was $18, so the feeling is, at least right now, that 2010 should be an improvement from 2009.

UBS chimed in with a positive comment on valuation in its preview of the results, saying the risk/reward profile was "fairly positive" in the near term. It believes a few ho-hum quarters may be just what the stock needs.

"However, following various disappointments over the past two years, it is possible that simply delivering a few quarters without any major surprises is enough to improve investor confidence," the firm told clients.

Wildcard

:

Given the embarrassing way the network has handled its decision to essentially force out Conan O'Brien and give the

The Tonight Show

back to Jay Leno, General Electric is probably thrilled it no longer owns NBC. Another benefit of the deal is, of course, the resulting windfall of cash.

Citigroup estimates that the company has between $14 billion and $16 billion to deploy when factoring in free cash flow generation, the NBC Universal deal with

Comcast

(CMCSA) - Get Report

, the sale of its GE Security unit to

United Technologies

, and fewer cash requirements in 2010, and the firm is curious about what the company and Chairman and CEO Jeff Immelt (pictured above) plan to do with that cash.

"We expect a measured and balanced mix of debt reduction and M&A in 2010, but no dividend growth before 2011, the firm said, adding that it would be looking for clues about potential M&A targets in executive comments around the earnings release.

It will also be interesting to see whether General Electric executives offer any public comment on the potential for a new tax on bank liabilities. A GE spokesperson told

TheStreet

on Jan. 15 that the company was

reviewing

the proposal.

Still, the biggest question mark going forward will remain the health of the Capital Finance unit. Citigroup said it sees a small pre-tax loss for the business in 2010 after corporate expense and other items, and added it will be looking for "additional clarity" on the company's conference call. During the recent investor update, General Electric indicated it expects losses for the unit to peak this year, but any further color it can provide on the timing of that peak will be welcomed by investors.

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Written by Michael Baron in New York.