Waning order trends, a decline in operating earnings and recent stock price appreciation are concerning some analysts who cover
and at least three are now lowering their full-year profit expectations on the company.
"GE's short-cycle order trends in May highlighted overall continued sluggish manufacturing activity, both in the U.S. and overseas," Merrill Lynch analyst John Inch said. May short-cycle orders were flat to up 5%, but excluding acquisitions and currency, Inch believes orders were fell by high-single digits and were relatively flat with April.
On a slightly positive note, Inch believes that though GE's plastics segment operating profit will fall below its second-quarter forecast of $135 million to $165 million, strength in the company's power unit and the
television network will somewhat offset the weakness. Plastics segment orders fell 15% to 20% in May, he said.
Inch lowered his 2003 earnings estimate to $1.59 a share from $1.61, which is analysts' average estimate. For 2004, he sees earnings of $1.72 a share, down from his prior estimate of $1.75. Analysts currently expect $1.76 a share, on average. Inch rates the stock neutral.
Worried About Plastic
At Prudential Financial, analyst Nicholas Heymann also cut his earnings estimates on GE due to expected lower operating earnings in the company's plastics, specialty materials and equipment-management units. He also expects a slight earnings dilution from a divesture and higher pension costs.
GE's near-term challenge is in its plastics and specialty materials unit, "where higher raw material costs and nominal unit volumes recovery are now likely to negatively impact third-quarter 2003 EPS," Heymann said.
He now expects 2003 EPS of $1.60, down from $1.65. He also thinks 2004 earnings will be $1.75, down from a prior estimate of $1.82. Still, Heymann rates the company a buy with a $38 price target, reduced from $40.
But Don MacDougall, an analyst at J.P. Morgan, sees less value in the stock. "Investors should be able to find better returns in other industrial stocks that offer more attractive valuations, greater leverage and stronger cash generation profiles," he said. He currently rates the stock underweight.
MacDougall believes GE will miss its guidance on its plastics business' in the second half of 2003. He reduced his expected earnings to $1.58 a share from $1.60 a share for the year.
In 2004, the analyst sees GE facing stronger headwinds on pension expenses and pressure from its power systems unit. MacDougall, however, maintained his 2004 EPS estimate of $1.70 a share, assuming there is a strong economic recovery.
"Our sum-of-the-parts valuation scenario suggests a current value for the stock of $26 to $27," MacDougall said. "We therefore believe the stock should trade below where it is trading today."
Recently, shares of GE were down 2.7%, or 83 cents, at $29.90.