Alternating Currents at GE

The quarter is solid, but dicey guidance dims the shares.
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Updated from 8:50 a.m. EDT

General Electric

(GE) - Get Report

posted a 24% jump in second-quarter profit Friday along with an upbeat assessment of economic conditions, but some dicey guidance had its shares in decline.

Earnings in the June quarter were $4.65 billion, or 44 cents a share, up from $3.75 billion, or 36 cents a share, a year earlier. Sales rose 13% from a year ago to $41.56 billion. Analysts surveyed by Thomson First Call were forecasting earnings of 44 cents a share on sales of $41.62 billion in the most recent quarter.

On a conference call with analysts, the company's CEO, Jeffrey Immelt, said the U.S. economic expansion looks "pretty robust," with solid growth prospects, while no "appreciable slowdown" is evident in China.

Despite this outlook, shares of GE were recently down 60 cents, or 1.7%, to $35.03 as traders balked at the company's mixed guidance for the rest of the year.

In its release, GE put full-year earnings at $1.80 to $1.83 a share, raising the low end of the estimate from its previous $1.78 a share. Analysts peg the year at $1.81 a share. In the conference call, however, the company said third-quarter earnings will be 43 cents to 44 cents a share, as much as 2 cents below the Thomson First Call consensus forecast.

GE earned 81 cents a share through the first six months of 2005. If third-quarter earnings are 44 cents a share, the company would need to earn 55 cents a share in the fourth quarter to hit $1.80 a share for the year. The consensus fourth-quarter estimate is 56 cents a share.

Prudential Equity Group analyst Nicholas Heymann maintained his overweight rating on the stock.

"With their accelerating confidence that GE's recovery to sustainable double-digit

earnings growth has arrived, it appears to us investors have begun to embrace that GE has finally turned the corner on its repositioning," said Heymann in a research note. The firm has no investment banking relationship with GE although Heymann "has a financial interest" in the company.

Heymann predicts GE will generate more than $63 billion in cash flow through 2007, of which $54 billion could be returned to shareholders and $9 billion used for acquisitions. With this in mind, he thinks the stock deserves a richer valuation than Wall Street is giving it.

Highlights of the company's top-line performance for the quarter included a 35% year-over-year rise at NBC Universal to $3.86 billion, a 29% rise in consumer finance to $4.93 billion, a 43% jump in infrastructure revenue to $1.23 billion, and 12% gains in equipment and health care revenue. Energy revenue rose 10% from a year ago to $4.54 billion.

Revenue in GE's biggest business line, commercial finance, rose 6% from a year ago to $6.07 billion.

The company said total second-quarter orders rose 13% from a year ago, while its backlog for major equipment orders rose 15% from last year to $23 billion. "Organic" growth, or revenue from businesses other than those that were recently acquired, rose 8% from a year ago.

In a statement, GE touted its strategy of focusing on longer-lived assets that throw off more predictable profit streams.

"Our simplification efforts will lower costs, generate cash for investment in future growth and make it easier for customers to do business with us," GE said. "These core initiatives position us to achieve consistent double-digit earnings growth with expanding returns on capital in 2005 and beyond."