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General Electric: Earnings Preview

General Electric followers will be looking for signs the worst is over at the conglomerate's financial unit, GE Capital, when the Dow component reports its first-quarter results on Friday.



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General Electric

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followers will be looking for signs the worst is over at the conglomerate's financial unit, GE Capital, when the Dow component reports its first-quarter results on Friday.

Concerns over GE Capital "appear increasingly manageable," according to a report earlier this month from Morgan Stanley analyst Scott Davis. Deutsche Bank analyst Nigel Coe expects "increasing confidence in a sharp

GE Capital profit recovery in 2011/12."

GE Capital CEO Mike Neal certainly hopes so. His business earned $1.4 billion in 2009, down 80% from 2008, and 87% below its peak in 2006. The performance led to wholesale changes in the strategy of his boss, GE Chairman and CEO Jeff Immelt, who vowed to shrink the unit that fueled the company's growth during the late nineties and the early part of this decade. GE Capital grew to the point where it represented more than a third of GE's revenues, consistently higher than any of GE's other four major operating segments.

The business remains massive. With $650 billion in assets at the end of 2009, GE Capital would be the fifth largest U.S. bank. For perspective,

PNC Financial

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US Bancorp

(PNC) - Get PNC Financial Services Group, Inc. Report

, the nation's fifth and sixth largest banks, had a combined $550 billion in assets at the end of 2009, according to

SNL Financial


That $650 billion total is down just $8 billion from 2008, but GE uses a different measure, called ending net investment (ENI). By this measure, which includes assets that GE needs to fund but strips out things like accounts payable and changes in foreign exchange rates, GE Capital's ENI fell to $472 billion from $525 billion. GE wants to bring ENI down to between $400 and $450 billion in 2012.

"That's a fair clarification on their part," says Jack Bartko, analyst at Standard & Poor's.

GE's U.K. mortgage business, which has been one of its weakest areas, should be significantly stronger. U.K. mortgages rose in value by 9% in February and are up 67% versus February 2009, according to the

Council of Mortgage Lenders

, a U.K. trade group. U.K. mortgage lending accounts for $24 billion out of GE's total $600 billion loan book.

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Another area of weakness has been GE's U.S. credit card portfolio, but that appears to be stabilizing despite high net charge off rates, says Moody's Investors Service analyst Mark Wasden.

A bigger concern for Wasden is GE's commercial real estate portfolio, which includes about $40 billion of properties GE owns and another $42 billion of loan exposure around the globe. GE has said it carries the equity portfolio, which includes a wide range of properties from offices to hotels and healthcare facilities, on its books at a higher than market would currently command. While GE is not a forced seller, it would like to sell some of those properties.



The company is expected to post a profit of 16 cents a share for the March period, according to the average estimate of analysts polled by

Thomson Reuters

, on revenue of $37.1 billion.

That performance would be down from earnings of 26 cents a share in the same period a year earlier on revenue of $38.4 billion, and earnings of 28 cents a share in the fourth quarter, although revenue in the December period reached $41.4 billion.

GE has a streak of coming in ahead of Wall Street's consensus estimates for four consecutive quarters on the line and a

long-time bear

said Thursday he thinks the company is likely to make it five in a row and that it could keep potentially keep it going for the rest of the year.


We sense GE's quarterly 2010 EPS may prove more resilient than widely anticipated due to strong aftermarket service and aggressive cost-reduction efforts," writes Sterne Agee's Nicholas Heymann in a research note to clients.

Heymann thinks GE could come in at 21 cents a share for the first quarter with lower than expected losses from the Olympics also playing a part.

General Electric itself has opted not to provide specific guidance for fiscal 2010, saying only that it expects its performance to be roughly flat with 2009 when it earned $1.03 a share.



One big potential wild card is new regulations that are likely force GE to set aside significantly more capital against potential losses than it has done on a historical basis. While GE has prepared for this, tougher-than-expected requirements combined with a stronger dollar versus the Euro could make it "desirable, perhaps necessary" for GE to inject further equity into GE Capital, according to a report from Deutsche Bank's Coe.

It remains to be seen, however, whether increased optimism around GE Capital is not already baked into the share price. GE's stock was up 4.3% this week as of Wednesday's close and has gained nearly 18% since March 2. Year-to-date, it's risen 28%, well ahead of advances seen in the major U.S. equity indexes it has historically traded in relation to.

The stock, up 1.3% to $19.60 in recent trades, reached a new 52-week high of $19.63 during Thursday's session, a feat it has accomplished regularly in recent weeks, so Wall Street is clearly expecting good news before tomorrow's opening bell. What progress Jeffrey Immelt (pictured above) can show at GE Capital could very well be the determining factor.


Written by Dan Freed in New York