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No Surprise at GE: Business Is Weak

Look for weakness in plastics, power systems, appliances and reinsurance when it reports Friday.

Updated from 3:44 p.m. EDT

General Electric

(GE) - Get Report

will probably buck the trend on Wall Street Friday by reporting in-line results for the first quarter and maintaining its guidance. But that doesn't mean the news is good.

In fact, GE, which makes everything from light bulbs to turbine engines, will say earnings per share declined about 8.5% in the first quarter to 32 cents. The company will also reiterate that it expects full-year profits to rise between 2.5% and 12.5% this year, hitting $1.55 to $1.70 a share. Given that the range is so broad, particularly for a company that has produced consistent double-digit returns for about ten years, the reaffirmation isn't likely to generate much enthusiasm.

"I think they'll say that the economy has slowed to a trickle and that some of their businesses are going to suffer and an earnings recovery is going to be pushed out," said Lawrence Horan, an analyst at Parker Hunter. "But they'll probably also say they are taking actions to cut costs."

Horan said GE saw weakness across a number of its business segments in the first quarter including power systems, plastics, appliances and its reinsurance unit.

Profits in GE's power systems business are expected to fall 40% in the quarter due to a decline in turbine shipments. And earnings at the firm's Plastics business are likely to be cut by 55% due to soaring energy prices. In addition, GE chief executive Jeffrey Immelt has said that NBC's profitability will be reduced by about $50 million before taxes, as coverage of the war interrupted popular programs like "Law & Order." Earnings are still expected to be up 10% at NBC, however.

Meanwhile, profits at GE's reinsurance business are expected to be flat. The company took a $1.4 billion charge in the fourth quarter to boost reserves at its Employers Reinsurance unit, after it experienced big losses related to the Sept. 11 attacks, floods in Europe and asbestos claims, among other things.

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Still, analysts believe that GE's financial services arm and medical systems should help to mitigate some of the weakness this quarter.

Horan said he is expecting GE to post earnings at the higher end of the range this year but said the company must take steps to improve its results.

"They need to get rid of certain

slow growing business like lighting and appliances, or they need to start outsourcing more of their production," he said.

Horan noted that GE has already started to move in the right direction, having struck up a deal with Samsung to make a new refrigerator in China. In addition, he said GE is receiving licensing revenues from other manufacturers who use the GE brand.

A.G. Edwards analyst Stephen East said he is expecting single-digit growth from GE this year but believes that the company "is positioning itself to be a market leader in the areas of the economy that should post the fastest growth over the next decade." This year will prove to be a mere blip in GE's record, he said, noting that earnings should still grow in excess of 10% over the longer-term business cycle.

Salomon Smith Barney analyst Jeffrey Sprague is equally optimistic about the firm's long-term prospects. "GE has some tough end market fundamentals to contend with, but is clearly executing well, as we see it," he said. Sprague, who believes GE could reach the upper end of its financial targets this year, said he is particularly impressed with the way the firm has navigated its way through the turmoil in the airline industry.

And despite criticisms about the quality of GE's earnings, Sprague said this is actually beginning to improve. He noted that the firm will have $200 million less in securitization gains from GE Capital this quarter, $100 million less in pension income and $100 million less in cancellation benefits from its Power systems business. He also noted that the firm is now expensing stock options. "In total, the headwind from these items is about 3 cents a share," he said.

Still, some analysts warn that the firm may have found other ways of artificially boosting its earnings. Last quarter, for example, Credit Suisse First Boston analyst Michael Regan described the company's income statement as "sloppy," noting that an unusually low tax rate probably added about 2 cents to its profits.

Regardless, General Electric has performed well since the start of the year, rising almost 12% to $27.20 as investors embraced the firm's more reasonable valuation after a 39% decline in 2002 and its good dividend. GE currently trades at 18 times trailing earnings and yields almost 3%.