GE Will Struggle to Hit 2004 Forecasts

The company affirms its current quarter and says it will hike its dividend.
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Updated from 9:29 a.m. EST

General Electric

(GE) - Get Report

investors appear willing to forgive lackluster earnings next year in exchange for more glowing results in 2005.

Shares of GE were lately up 95 cents, or 3.34%, to $29.40, despite news that the maker of light bulbs, X-ray machines and aircraft engines will struggle to meet 2004 estimates, partly because of dilution and a slowdown at its power unit.

The stock is still below its 52-week high of $32.42, and it trades at a discount to other industrials.

On Wednesday the conglomerate said it expects earnings of $1.55 to $1.65 a share in 2004, compared with analysts' forecasts for $1.65 a share, according to Thomson First Call. Reflecting the impact of the

Genworth

,

Amersham

and

Vivendi Universal

transactions, GE said earnings would be $1.50 to $1.60 a share. But the company said it was positioned for double-digit growth in 2005.

"The transformation of GE's business portfolio for faster long-term growth in earnings, cash and returns is on track," said chief executive Jeff Immelt, in a statement. The company said it expects double-digit earnings growth in 11 of its 13 businesses in 2004. It also set plans to increase its dividend by 5% to 20 cents.

GE also affired guidance, saying it expects to earn 45 cents to 47 cents a share in the fourth quarter of 2003, in line with existing estimates and representing a 45% jump from last year's earnings.

Over the past year, GE has deemphasized lower return businesses. Most recently, it announced plans on Tuesday to spin off its life insurance and mortgage operations in an initial public offering. Earlier, the company expanded its medical and media divisions with takeovers of Amersham and Vivendi Universal.

Jim Kelleher, an analyst at Argus Research, said GE is trying to make its medical unit the earnings driver that the power division once was. Power delivered double-digit earnings growth in the 1990s, according to Kelleher, who noted that the unit is expected to earn $4.2 billion this year, a third less than last year.

"They've also made a big bet in media," added Kelleher.

On Wall Street, some are wagering that GE's latest portfolio transitions will usher in a return to a new era of double-digit growth, as well as better share performance. On Tuesday, Merrill Lynch upgraded the stock to buy in anticipation of a

breakout year in 2005.

"If the business doesn't recover next year, investor patience will be worn thin," said Kelleher.

In the meantime, other firms are less optimistic than Merrill -- at least in the short term. "We are lowering our 2004 earnings estimate to $1.55 a share, reflecting dilution from the IPO as well as further analysis of the headwinds next year," said Don MacDougall, an analyst at J.P. Morgan, in a research note.

The headwinds MacDougall cites are pension and options losses, as well as transaction-related costs.

"With earnings likely stabilizing, albeit at a surprisingly low level, and the bulk of portfolio transformation behind GE by the first half of next year, the stock story looks healthier than it has in several years, though valuation leaves us comfortable with a neutral rating," MacDougall added.