GE Earnings Preview: Slight Drop in Earnings On Low-Margin Goods

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Immelt
"The outlook for developed markets remains uncertain, but we are seeing growth in China and the resource rich countries," General Electric Chairman and CEO Jeff Immelt said.

General Electric Co. is expected to report slightly weaker first-quarter earnings because of a backlog of low-margin thermal and industrial equipment plus slow health care revenue growth.

GE is set to report Friday before the markets open.

Analysts polled by Reuters expect a 0.5 percent reduction in earnings to 33 cents per share. Operating profit is expected to be $4.77 billion for the first quarter with a profit margin of 13.8 percent, a reduction from the fourth quarter of 2011 when GE's profit margin was 15.7 percent. First-quarter revenue is expected to decline 9.7 percent to $34.7 billion. 

Despite the forecast declines, Wall Street expects a positive reception Friday when the conglomerate releases results for the first quarter, a period in which shares rose 12 percent.

We expect GE's results to be well received by the market partially due to low expectations and weak sentiment but also because of the quality of the results, wrote Scott Davis, Barclays Capital analyst for the Fairfield, Conn., company.

GE should have a good quality quarter with upside coming from the most important driver - industrial margin. Earnings quality is normally the key for GE and accelerating energy service revenue will offset low-value equipment backlog, Davis wrote.

Pricing on orders for thermal equipment, which includes gas turbines, took a hit in the fourth quarter of 2011, dropping 12.5 percent, a decrease that continued to eat into margins during the first quarter, according to Davis.

The strong operation experience gained by GE gas turbines with a wide variety of fuels creates favorable prospects, Paul Browning, president of GE's thermal products business, said March 28.

GE Industrial margins should finally show signs of life despite pressure from the sell-through of last year's lower margin backlog, Davis wrote.

Revenue for GE's global health care business rose a mere 1 percent in the first quarter due to a weak market in Europe and flat U.S. sales, he said.

However, because of GE's large overall commitment in the energy sector and an almost 40 percent increase in electrical consumption during the first quarter, GE is expected to see major gains in its energy and gas turbine division for the quarter, Davis said. While natural gas-generated electricity made up 18 percent of U.S. consumption from 2008 to 2011, it increased to 26 percent in the first quarter. GE currently has roughly 50 percent market share of the U.S. gas turbine market.

GE's energy division grew 13 percent in the first quarter of 2012, partly on acquisitions, according to Davis.

GE Aviation saw $4.9 billion in revenue in the fourth quarter of 2011 from a 2 percent increase in volume, and it received $6.9 billion in orders for the first quarter, an 18 percent increase over the previous quarter. As of mid-March, GE had an equipment backlog of $23 billion, an increase of 7 percent.

In the first quarter GE's aviation division saw an approximately 5 percent top-line growth and a slight expansion in margins after a weak fourth quarter 2011, Davis wrote. Likewise, 8 percent after-market growth is projected for the first quarter, despite tough competition. GE's aviation profit margins in the first quarter were 19.5 percent, compared with 17.3 percent in fourth quarter 2011.

R&D and launch expenses in GE's aviation division are expected to fall as a percentage of sales in the first quarter, according to Davis.

The first Boeing 787 Dreamliner powered by GE's GEnx-1B engine was delivered to Japan Airlines in March. Over 1,300 GEnz-1B engines have been ordered for the Boeing 787, and commitments for the engines total $16 billion.

GE's real estate operations likely reduced losses in the first quarter, according to Langenberg & Co.

Shares rose 12 percent during the first three months of this year.

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