General Electric Co.’s Chief Executive Officer Jeffrey Immelt aims to deliver consistent profit growth after the recession by concentrating $25 billion of stockpiled cash on industrial businesses, some of which date to the company’s founding by Thomas Edison.
Investors will scrutinize tomorrow’s third-quarter earnings report for indications of how well his strategy is working. Analysts project a second straight quarter of higher profit after eight periods in which it declined or was little changed. Adjusted earnings may be 27 cents a share on sales of $37.4 billion, the average of estimates in a Bloomberg survey.
Immelt, 54, is shrinking the finance unit to “come back to the industrial and infrastructure roots that made the company great,” Steven Winoker, an analyst with Sanford C. Bernstein & Co., said after GE’s agreement last week to pay $3 billion for Dresser Inc., a maker of oil-field equipment.
GE, the world’s biggest producer of power-plant turbines, jet engines and medical-imaging machines, expects to have as much as $25 billion in discretionary funds at the parent-company level by year-end after hoarding cash during the recession, selling a majority stake in NBC Universal and honing GE Capital’s focus on fields where it has a distinct advantage.
The Fairfield, Connecticut-based company raised its dividend 20 percent in July and resumed share buybacks while boosting research and industrial acquisition spending.
The stock, which dropped more than seven times as much as the Standard & Poor’s 500 Index in the five years through 2009, responded. Before today, GE climbed 14 percent in 2010, while the S&P 500 gained 5.7 percent. The shares today fell 12 cents to $17.16 at 4:15 p.m. in New York Stock Exchange trading.
“GE is still a value story, given that it is unlikely to see meaningful earnings upside until 2012,” Deane Dray, a Citigroup Inc. analyst in New York, said in a research note. He has a “buy” rating on the stock, while Winoker, also based in New York, rates it “outperform.”
The company may benefit from lower credit-loss provisions at GE Capital and at the corporate level as Immelt seeks to pare net investment in the finance unit to $440 billion in 2012, Deutsche Bank AG’s Nigel Coe and other analysts wrote in reports to investors this month.
Immelt is starting to make acquisitions in areas where the finance unit is dominant, including the purchase of $1.6 billion in U.S. consumer loans last week from Citigroup Inc.
“It’s reassuring, the Dresser deal and the Citigroup deal, because those weren’t bet-the-ranch deals to get growth,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors Inc. in Cincinnati. “It’s nice to see them do logical bolt-ons.”
During the next three years, the parent company may have as much as $30 billion to spend on acquisitions that would expand existing businesses while continuing to grow via research and development, said Vice Chairman John Rice, who oversees the GE Technology Infrastructure segment, including aviation, transportation and health-care divisions.
“That doesn’t mean we’ll spend that money,” Rice said at a September investor conference. “We’re not going to chase bad deals just so we can say we spent x billion on M&A.”
During the three months through September, GE Energy sales may have declined amid fewer wind-turbine shipments, while orders probably rose as the unit expands through purchases and adds products such as solar-energy equipment, Winoker and Coe said.
Higher prices and new products may drive a third straight profit increase at the health-care division, Sorrentino said in an interview.
“With health care, I don’t think there’s going to be any apologies,” he said.
Sorrentino, whose firm owns 5.48 million GE shares, estimated profit of 29 cents a share, compared with the 27-cent average estimate of 13 analysts in the Bloomberg survey.
Sales of $37.4 billion, the average of 10 estimates, would be little changed from a year earlier.
Sorrentino has a 36-month price target of $24 for GE shares, presuming the economic recovery continues.
“I’m a little more optimistic” than most Wall Street analysts, Sorrentino said. “Barring any ‘What was that?’ announcements” on a conference call to discuss the earnings report, results should reassure investors, Sorrentino said.
‘Headed the Right Way’
Shareholders typically look at industrial equipment, service and total backlogs to gauge how quickly orders may turn into revenue and profit. Total equipment orders rose 17 percent in the second quarter while the backlog held steady at $172 billion, GE said.
“This is not a quick turn, but it is one that is certainly headed the right way,” said Nick Heymann, a New York analyst with Sterne Agee & Leach Inc. who has a “neutral” rating on the stock. “The big dividend increase was designed to return effectively the growing cash pile the company has accumulated and now we’re starting to see them put it back to work from an acquisition standpoint.”