Expect GE's Slow, Steady Improvement to Continue

NEW YORK ( TheStreet) -- Analysts generally expect General Electric ( GE) to continue its slow and steady improvement, supporting further growth over the next few years.

GE on Friday will announce its third-quarter results, with analysts polled by Thomson Reuters on average estimating earnings of $3.649 billion, or 35 cents a share, compared to 36 cents a share in the second quarter and 35 cents a share in the third quarter of 2012.

Revenue is expected to come in at $35.955 billion for the third quarter, increasing from $35.123 billion the previous quarter and $36.349 billion a year earlier.

GE's shares closed at $24.35 Wednesday, returning 19% this year, following a 21% return during 2012.

"Our analysis indicates that over the last two decades GE's stock performance has closely tracked the company's ROE," wrote Bank of America Merrill Lynch analyst Andrew Obin in a note to clients on Oct. 10. The company's return on average shareholders' equity during 2012 was 12.1%. Obin estimates the ROE for all of 2013 will improve to 13.9%, with further improvements to 14.7% in 2014 and 15.5% in 2015.

The U.S. stock market has been very strong over the past two years, particularly companies with significant financial services businesses, as the recovery from the credit crisis continues. But Obin's analysis is very significant for investors. If the correlation of stock performance to ROE continues, GE's investors can look forward to many years of outsized gains.

Obin rates General Electric a "buy," with a $26 price objective. That implies growth of 7% over the next 12 months. But investors with strong faith in GE CEO Jeff Immelt's continued success in improving GE's performance may have much brighter outlooks for the next several years.

Investors will be looking for progress on GE's backlog of orders. The company's total backlog of equipment and services orders reached $223 billion at the end of the second quarter. With a strong flow of orders, GE's oil and gas revenue during the second quarter was up 9% from a year earlier, to $3.955 billion. However, power and water revenue was down 17% from a year earlier, to $5.715 billion.

When asked during GE's second-quarter call when "revenues are going to pull through," from the backlog, Immelt said "if you look at Power & Water it is going to strengthen in the second half. And the other businesses, I would say, are already demonstrating some nice momentum."

Credit Suisse analyst Julian Mitchell in his earnings preview for electrical equipment and multi-industry manufacturers on Oct. 7 wrote that his research team expected GE's third quarter to be "similar to Q2 -- decent order growth (which could approach a double-digit rate y-o-y given the easy base in Q312; Q312; note the majority of the Algeria P&W win is booked in Q413)."

GE in September announced three contracts with Algeria's national gas and electric company, for $2.7 billion, which includes providing turbines for six power plants.

Mitchell also expects "solid margin trends (up ~50bps y-o-y in Industrial), offset by very high corporate costs." Looking ahead, "For 2014, we expect the CEO to underline that orders imply a decent pick-up in sales growth, and that the cost-cutting progress YTD should help drive another 50-100bps of margin expansion," he wrote.

"We think the stock will remain subdued short-term as estimates are reduced, but the orders news and solid margin should be prove reassuring, in light of fairly low expectations," Mitchell added.

Mitchell is ahead of the consensus, estimating GE will report third-quarter earnings of $3.802 billion, or 36 cents a share, on revenue of $36.349 billion.

GE Capital

Investors will also be looking for continued improvements and leverage from GE Capital, which during the second quarter upstreamed a dividend of $1.9 billion to the holding company.

GE Capital had $515.5 billion in total assets as of June 30, declining from $533.4 billion a year earlier. The unit's "ending net investment" (ENI), excluding non-interest bearing liabilities, cash and equivalents, was $391.2 billion. Immelt has said his goal for GE Capital's ENI is a further reduction to $300 billion to $350 billion by the end of 2013.

Despite the continued large dividend payments to the parent company, GE Capital's regulatory capital continues to increase. The unit's Basel I Tier 1 common equity ratio was 11.2% as of June 30, increasing from 10.1% a year earlier.

GE's Stock

General Electric's shares trade for 13.5 times the consensus 2014 EPS estimate of $1.80. The consensus 2015 EPS estimate is $1.94.

Based on a quarterly payout of 19 cents, the shares have a dividend yield of 3.12%.

GE Chart GE data by YCharts

Interested in more on General Electric? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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