|GE CEO Jeff Immelt|
GE isn't just a read on the general business climate and spending plans of major industrial buyers globally, but through its financial arm, GE Capital, is directly exposed to the macroeconomic topic of the day, week, month and year: the European debt crisis. "With Europe on investors' minds, it is worth noting GE's European assets approximate $125 billion (out of about $570 billion in total GE Capital segment assets," according to a GE preview penned by Oppenheimer & Co. analyst Christopher Glynn. Direct exposure to PIIGS sovereign debt stands at only about $300 million for GE.In very round numbers, European assets include about $35 billion in each of CLL (commercial lending and leasing), UK/France residential mortgage (about one-fourth French prime, balance UK sub-prime), and Eastern European banks, in addition to about $10 billion of commercial real estate, and $10 billion that is described as "other/misc.", according to Oppenheimer. Jeff Sprague of Vertical Research Partners noted in a GE preview, "The most pressing area of concern for investors this quarter is likely to be finance exposures within Europe and what kind of collateral or hedging is in place to protect against defaults or declining valuations. ...We will look for updates on all of these exposures during the call and where nonearnings and charge-offs have been trending." Aside from the European credit quality issues, Morningstar analyst Daniel Holland said, "To the extent that GE Capital can come in with a solid number, without goofy tax items and can make the case that it is doing what GE says it's supposed to do, going to work and coming home and paying the bills, GE Capital could have a decent quarter."
In recent quarters, GE has noted a pickup in quoting activity in key businesses like gas turbines, and in general analysts have been looking for signs that some of the "late-stage" economic recovery GE markets will show strength. Any sign of a change in tone from GE, a signal that some customers are putting the brakes on new spending and potentially delaying orders, would be an unwelcome indication that the macroeconomic situation could derail some hoped-for GE sales growth. Daniel Holland, analyst at Morningstar said, "Last quarter the buzz was all around more quoting activity, and so whatever might have happened, has that continued through the downturn? We need to glean if the backlog is as strong as we think and that's a read on the macro environment." As Oppenheimer's Glynn noted, "Industrial earnings lack meaningful cyclical leverage to a re-accelerating economy, given largely stable services growth and long-cycle equipment lead times." GE, given its slow-moving nature, can be even more sensitive if hoped-for growth isn't going to occur. Oppenheimer trimmed its estimates "modestly to reflect recent economic bumpiness as well as items specific to GE's businesses." Oppenheimer trimmed its third-quarter outlook by 1 cent to 31 cents a share, saying that weaker consumer over the summer may magnify any sequential seasonal uptick in third-quarter losses. Oppenheimer lowered 2012 EPS by 5 cents to $1.55, "to better capture mix headwinds on margin (wind and gas turbines) and a potentially more moderate pace of improvement at GE Capital as a hedge against a more volatile economy." Vertical Research's Sprague said of the gas turbine business, "Unit volume is slowly rising, but we are not counting on a gas renaissance to lift the prospects for GE's energy business just yet. GE shipped 114 units in 2010 and expects about 120 in 2011 and 130-135 in 2012." The consensus call on GE is for earnings of 31 cents a share on revenue just short of $35 billion. Though bear in mind, it wouldn't be a surprise -- or a cause of excitement -- if GE beat by 3 cents, with 2 cents coming from a tax gain and 1 cent in foreign exchange.
The recent results from industrial competitors United Technologies ( UTX) and Parker Hannifin ( PH) were strong, indicating that the capital spending among industrial customers is still more positive than not, though there have been industrial losers this quarter, with Ingersoll-Rand ( IR) lowering its full-year guidance. "Lots of commentary from CEOs has been in the vain that things are better than the headlines indicate and we might be making it, another recession, a self-fulfilling prophecy," Morningstar's Holland said. The biggest issue likely to be aired involving competitors will be the long-standing competition between GE and United Technologies in the aircraft engine space. GE's GenX engine technology has been seen as threatened by UTX's more recent geared turbofan innovations. However, around last quarter's earnings, GE was able to announce a big win in an order from AMR ( AMR). The critics haven't gone away, though, and recent acquisitions by UTX, including its major acquisition of Goodrich ( GR) and the buyout of Rolls-Royce's part in an engine joint venture imply that GE's competitive positioning in the aircraft engine market may again receive scrutiny from Wall Street and investors. Rolls-Royce and UTX's Pratt & Whitney announced last week the development of new engines for future mid-size aircraft in the 120 to 130-seat segment, a key market for GE. Rolls-Royce and Pratt & Whitney also agreed to restructure the existing aircraft engine venture with IAE, with Rolls-Royce agreeing to sell its equity stake in the engine company to the UTX company for $1.5 billion. "UTX really doubled down with the bets on Goodrich and the buyout of Rolls-Royce, so any reaction from GE would be interesting, and it looks like GE has to prove its aircraft technology again," said Morningstar's Holland. Energy
GE made a string of energy acquisitions in the past year to bulk up in the oil and gas sector, just short of $10 billion, and right now, investors are very cautious on the space. Results from the first major player in the oil and gas service sector, Halliburton ( HAL) was met by the market with a selloff. Granted, Halliburton beat the Wall Street consensus, it just didn't beat by the same margin that investors had become accustomed to, and shares of Halliburton had run up for two weeks into earnings. GE won't sell off sharply on energy results since it's far from a pure play, but with energy a much bigger part of GE it's more important to monitor, especially with investors cautious about the entire energy sector. Is GE taking share from a Halliburton, losing share to a Halliburton, and is its outlook on the impact from energy acquisitions at all muted given the recent economic sentiment? Morningstar's Holland said even with these questions logical to ask, he thinks energy -- alongside aerospace -- could be an area to receive a "++" from CEO Immelt this quarter. Overall, the Morningstar analyst added, "I think a boring and benign report over and over again actually helps GE's case to a degree in this market just because it's historically a stock investors depend on for earnings quality." It may not, however, help its stock price much in the short-term, which is currently trading at $16.70. It's 52-week low is $14.02, hit on Oct. 2, 2011. -- Written by Eric Rosenbaum from New York. >To contact the writer of this article, click here: Eric Rosenbaum. >To follow the writer on Twitter, go to Eric Rosenbaum. Follow TheStreet on Twitter and become a fan on Facebook.