General Electric (GE): Comprehensive Review Ahead of Earnings

The world’s conglomerate leader, General Electric (NYSE:GE), is set to report earnings on Friday morning early ahead of the opening bell.  Just recently, the company reaffirmed its guidance for the quarter and for the full year when it was discussing "a pretty good economy."

First Call estimates are now $0.50 EPS and $42.4 Billion in revenues, but this look like it is adjusted downward to account for the plastics unit and for exiting Japanese personal loan operations and for items rather than a mass exodus on earnings.  Prior to the changes, the range given was $0.54 to $0.56 EPS on total revenues of approximately $42 Billion, with net earnings of $5.5 to $5.7 Billion.  The truth is that in modern history the company is never really that far off and the one-time items are going make this harder to look at for the quarter.  It previously offered $2.18 to $2.23 for Fiscal 2007, and we are going to be focused on the guidance more than on the past.  We backed out the charges for restructuring and divested operations, but the number here appears to be one-penny lower now after backing out items with the new Fiscal 2007 estimate at $2.20 and revenues of roughly $171.4 Billion.

The stock is within 1% of multi-year highs, but the stock has more or less been trading in a $41 to $42 trading range for most of the last three weeks.  Analysts have an average target of $44.00 to $45.00, depending on which targeting sources you use.  With the favor going back into mega-cap stocks and with the shares within $2.00 to $3.00 of the targets, it is actually fathomable to see targets raised if the company offers some formal 2008 targets.  If that happens a new target range is likely to ratchet up to a $46.00 to $48.00, but understand that is purely for conjecture at this point.  We won’t have an exact number until today’s close, but as of mid-morning today it appears as though options traders are only factoring in up to a 1% to 2% price change in either direction.

To make matters more complicated on a longer-term basis, the Financial Times yesterday broke news that GE’s NBC unit "MAY" be up for review for a spin-off.  This is noted as being a post-Olympics decision for 2008, and we have noted that an entire spin-off might be better in pieces.  This is not a full break-up of the company like we said would be a bad idea on CNBC.  We’ll also look to see if the Boeing Dreamliner delay yesterday has any impact on its jet engine business and service contracts like it did on other suppliers.  There are other key issues to watch:

• The company is rapidly growing by acquisitions into the oil and gas markets.
• We have noted how recent strength was essentially 5-year highs in the stock.
• Recent financial changes were essentially immaterial.
• The outlook ahead will be without the plastics unit after the sale closed.

If you’d like to see a preview we did ahead of last earnings you can see it here.

Jon C. Ogg
October 11, 2007