Few Sparks at GE

While earnings were in line, the company's margins and guidance failed to impress.
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Updated from 1:32 p.m. EDT

With the

Dow Jones Industrial Average

making records, a solid third-quarter earnings report from

General Electric

(GE) - Get Report

wasn't up to snuff on Wall Street.

The company's CEO, Jeff Immelt, offered a positive outlook on the economy, but investors were looking for an upside that didn't materialize.

The Dow component and industrial bellwether, whose sprawling portfolio of businesses range from manufacturing to the media, said Friday that it earned $4.96 billion, or 48 cents a share, in the third quarter, up 6% from $4.68 billion, or 44 cents a share, a year earlier.

Excluding certain items, the Fairfield, Conn., company earned 49 cents a share, matching Thomson First Call's average analyst estimate. GE posted a 12% revenue gain to $40.86 billion, beating expectations of $39.9 billion.

For the year, GE said it expects to earn $1.97 to $1.99 a share, which is line with estimates. The updated guidance shaves off the low end of its previous guidance, which was $1.94 a share, which in part may be due to lower-than-expected tax rates in the back half of the year.

"When you back out the change in the tax rate, the operating guidance didn't really improve," says Christopher Kotowicz, an analyst with A.G. Edwards. "In fact, you could argue that this really lowers expectations."

Shares of GE recently were trading down 55 cents, or 1.5%, to $35.67.

"Our portfolio changes and long-term strategy are paying dividends," said Immelt on a conference call. "The markets where we compete continue to be favorable for GE and our businesses are experiencing significant tailwinds."

He also said U.S. consumer spending is strong, further challenging the widespread view on Wall Street that consumers are facing a slowdown.

Immelt's comments hold particular weight with investors since his position offers a unique, bird's eye view of the U.S. economy. Merrill Lynch analyst John Inch, however, said in a research note that the company's profit margins were weaker than expected.

Inch noted that while GE's strong top line was driven by its infrastructure segment, which had revenue of $12.1 billion, the unit converted only 23% of that revenue into operating profits. That marks an improvement from its average performance in the first half, but Inch said it lags his expectations.

Morningstar analyst Peter Smith says the infrastructure segment's results were good, but margins at GE's industrial business were a disappointment. That unit, which includes energy and transportation businesses, posted a 10% jump in profits to $692 billion, but the company previously forecast a 15% increase. The division's revenue rose 3.3% to $8.53 billion, but the company had been expecting a 5% increase.

Meanwhile, GE Capital's profit growth slowed to a 4% clip, and NBC Universal, GE's media unit which has struggled with weak TV ratings, posted a 10% profit decline, even while its revenue rose 20% to $3.63 billion.

"The situation keeps getting worse at the NBC division, but that is widely expected," Smith says. "That was already baked into results."

Another disappointment came from GE's plastics business, which has also been struggling. It posted a 23% decline in profits due to higher commodity prices.

GE's commercial-finance and consumer lending unit posted a 6.4% rise in earnings to $1.29 billion, while its revenue added 11% to $6 billion. The healthcare division posted a 19% increase in earnings to $700 million, and a 20% gain in revenue to $3.63 billion.

Kotowicz also said the market may be focusing on margin issues. "They didn't get the margin expansion that they were hoping for," he says.

Smith says he's surprised that GE's stock is reacting negatively to the results, but he believes the company's performance will start to look better to investors if the economy begins to slow.

"GE's infrastructure business is a late-cycle business that tends to do well in the later stages of an economic growth cycle, so maybe people see its strength here as a negative for the economy," Smith says. "If that's true, shares of GE will start to appeal more as people start to appreciate its strong fundamentals."