General Electric Earnings Surge

The conglomerate's fourth-quarter profit jumps 45%, but 2004 presents plenty of challenges.
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Updated from 7:27 a.m. EST

General Electric

(GE) - Get Report

snapped a string of profit declines Friday but continued to warn that it faces some big headwinds this year.

In a conference call, GE executives reiterated that earnings per share would hit $1.55 to $1.65 this year, compared with $1.55 in 2003. Excluding the acquisition of

Vivendi Universal's

U.S. assets and

Amersham

, and the IPO of

Genworth Financial

, earnings are expected to range from $1.50 to $1.60 a share.

"We have three drags in the portfolio this year that continue," said Chief Financial Officer Keith Sherin. "We have the last year of the power bubble, which is about 7 cents. We do have a noncash reduction in pension earnings

of 6 to 7 cents and then we have the impact of the 2003 dispositions, mostly lost earnings, of 4 cents."

Last year, GE sold a number of businesses, including GE Edison Life, Financial Guaranty Insurance Company, GE Superabrasives, and Specialty Chemicals. The company has been changing its portfolio mix toward higher-growth, higher-return businesses.

While the company expects single-digit profit growth overall in 2004, nine out of 11 businesses should show double-digit growth.

"We're really seeing a broad pickup in demand," said Chief Executive Jeffrey Immelt. "The company's in great shape financially, the markets look pretty good, we delivered what we said we'd deliver and we've got good momentum going into 04."

Immelt said GE still isn't seeing any pricing power outside of raw materials, but he noted that productivity continues to be very strong.

General Electric reported earnings of 45 cents a share in the fourth quarter, up 45% from the same period last year and in line with analysts estimates. The company saw year-over-year earnings decline over the past four quarters. Still, Credit Suisse First Boston analyst Michael Regan said the quality of earnings last quarter was disappointing.

He estimates that an unusually low tax rate at GE Capital added about 2 cents to the bottom line. In addition, he said operating margins at GE Medical were weaker than expected and could signal softening in its base business.

"While the company pointed to a 19% rise in fourth quarter orders and strong momentum going into 2004, we continue to expect essentially flat earnings for the year," Regan said.

Citigroup analyst Jeffrey Sprague is more optimistic. "Our main takeaway is that underlying business conditions are clearly turning," he said. "We expect GE's

first half to be dominated by its portfolio moves, but see earnings turning higher in

the second half, with a resumption of double-digit growth in 2005."

GE reported a net profit of $4.56 billion in the fourth quarter on revenue of $36.96 billion. That compares to earnings of $3.10 billion on sales of $35.51 billion a year go.

Excluding a charge of $1.4 billion to write down its Employees Reinsurance Co. unit last year, a cyclical downturn in its power systems unit and lower noncash earnings from pension sources this year, GE's earnings rose 11% year over year.

Top-line growth was driven by a 30% jump in consumer finance revenue to $5.05 billion from $3.08 billion a year ago, a 21% jump in medical systems revenue to $3.32 billion from $2.75 billion a year ago, and a 12% rise in industrial products revenue to $2.28 billion from $2.03 billion a year ago. The only major revenue decrease came in the power systems unit, where it fell 8% to $5.34 billion from $6.01 billion.

Profit growth also was strong in consumer finance, surging 38% to $506 million in the quarter compared with last year, while profit rose 33% to $1.13 billion in commercial finance and rose 14% to $536 million at GE's NBC television network. Power systems profit contracted 15% to $1.16 billion.

At GE's plastics unit, viewed by many as a good economic bellwether, revenue rose 5% to $1.39 billion, while profit rose 10% to $151 million.

"Our company will enter 2005 positioned for double-digit earnings growth, with a tremendously strong set of businesses led by a terrific management team," GE said in a press release.

Analysts surveyed by Thomson First Call expect General Electric to earn $1.57 a share on revenue of $140 billion in 2004 and $1.75 a share on revenue of $154.67 billion in 2005. Shares of GE were recently up 1.4%, or 45 cents, at $32.45.