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Looking for Light From GE

Its profit report Friday will provide key insight into the economy.
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With Wall Street more attuned to the risks facing the global economy this year, investors may be especially plugged in to

General Electric's

(GE) - Get General Electric Company Report

earnings report Friday.

The massive conglomerate's first-quarter release comes as the market braces for a

sharp slowdown in corporate profit growth that could signal trouble for the U.S. economy. GE, with its $360 billion market capitalization, is in the best position to observe the broader situation.

Moreover, the stock may provide an opportunity for investors to weather the storm. If the U.S. is approaching a slowdown, then stock-pickers should zero in on a diverse portfolio of strong businesses built for modest but steady returns over the long run. Or, they can buy shares of GE and let its top-shelf CEO, Jeff Immelt, do that for them.

"Our strategy is to remain in stocks that are long international and late-cycle markets, where trends are strongest, and to revisit more discounted U.S. and short-cycle focused names following earnings" said Deutsche Bank analyst Nigel Coe in a recent note to clients.

Coe named GE as one of his top picks.

The company is expected to report earnings of 44 cents a share, before one-time items, on revenue of $39.8 billion, according to Thomson First Call. That would mark a 12% increase in EPS on an operating basis, and a 5% rise in revenue.

Jeffrey Germanotta, an analyst with William Blair & Co., predicted in a recent note that GE will record revenue of $40.2 billion, representing 6% growth from a year earlier.

Though his forecast is above the consensus Wall Street view, it still marks a slowdown from the double-digit revenue gains posted by GE last year. The decline is partially due to a few divestures, as well as a revenue boost a year ago from the Winter Olympics, but also represents broader weakness.

"While the financial arm of the company should report sustained revenue growth in the low-double digits, we expect industrial business revenue to be up only about 1%," said Germanotta.

He attributed the slow growth for GE's industrial business to the struggling construction sector amid the slump in the U.S. housing market and continued difficulties at its media conglomerate, NBC Universal.


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Meanwhile, the moderation in revenue growth at GE also reflects the broader slowdown in the U.S. economy as the once red-hot housing market has turned cold. Investors have been left struggling to gauge what the fallout from this transition will be.

The company's quarterly earnings call is an occasion for Immelt to provide his market-moving diagnosis of economic conditions around the world, and Friday will be no exception. Germanotta expressed confidence that whatever the verdict may be, GE will sound a note of optimism.

"Although GE faces a more challenging operating environment in 2007, healthy backlogs, and strong order growth in many of the long-cycle, lower-margin industrial segments should lead to solid revenue growth in those businesses," said Germanotta.

More importantly for investors, the market has anticipated the slowdown at GE, and that may be opening a window of time to buy the stock at a discount. Shares of GE are down more than 5% so far this year after gaining 9% in 2006.

CIBC World Markets analyst Christopher Glynn pointed out in a recent note that GE is currently trading at its lowest price-to-earnings ratio since the end of 2002 and the first quarter of 2003, which at the time was the lowest valuation for the company in 12 years. GE's dividend yield, 3.2%, is the highest since early 2003 and matches its highest level in a decade.

Based on his earnings and revenue estimates, Glynn predicts that if those valuation levels hold steady, GE could deliver a 14% return to shareholders over the next year. Further decline in its price-to-earnings ratio remains a threat, but Glynn noted that even his bear case would provide a positive 12-month return.

He said secular demand for global infrastructure in emerging markets abroad and continued execution at its giant banking business should support the stock's valuation.

Shares of GE recently were trading up 24 cents, or 0.7%, to $35.18.