With last year's panic selling fading from memory, shareholders of General Electric Co
Wall Street will be watching when the world's largest maker of jet engines and electricity-producing turbines reports results on Friday to see how well its maintenance business -- which has buoyed GE through the downturn -- is holding up and whether delinquencies at its hefty finance arm are declining.
Those factors will determine the heading of the company's shares, which have more than tripled from the 18-year low they touched in March 2009, despite what is expected to be the company's ninth straight quarter of profit declines.
What's the trajectory of this year versus last year at GE Capital? My sense is that things are going better than what the company thought back in December, said Daniel Holland, equity analyst at Morningstar in Chicago. The best sign would be to see the delinquencies starting to come back down. Another positive for the company and the economy in general would be if you start seeing the company liquidating pieces of the portfolio they call troubled assets. That would mean that there is starting to be a market for them again, since GE has been disciplined about not selling assets at rock-bottom prices.
GE is scaling back its finance unit, which it aims to reduce so that it generates about 30 percent to 40 percent of overall profit, down from more than half before the recession.
The Fairfield, Connecticut-based company has just navigated what Chief Executive Jeff Immelt in his annual letter to shareholders called the decade from hell, which pounded its results and convinced management it was time to refocus on GE's industrial core, trimming back its finance portfolio and selling a majority stake in its NBC Universal media business.
But that brutal decade is coming to an end: Immelt in December forecast 2010 GE profit will be flat with last year's result and Chief Financial Officer Keith Sherin last month said GE expects to grow earnings and raise its dividend next year.
Investors expect net income to fall about 35 percent this quarter, with the consensus view being that profit will begin to rebound significantly in the third quarter. While the company has stopped giving per-share profit forecasts, investors will be listening closely for any sign of whether GE's outlook has improved since Immelt issued the flat target.
Analysts, on average, look for first quarter profit of 16 cents per share, excluding items, on $37.1 billion in revenue, according to Thomson Reuters I/B/E/S.
Its shares have risen about 65 percent over the past year, outpacing the 36 percent rise of the blue-chip Dow Jones industrial average <.DJI>. About 10 percent of GE's recent rise has come in the last month, which could suggest investors' hopes have risen.
Shares of fellow blue chip Alcoa Inc
Like its sometime rival United Technologies Corp
Investors will be watching closely to see if that service revenue held steady in the first quarter.
One of the reasons that we've stuck with them is the stability of the services revenue, said John Dowling, portfolio manager at Golub Group, a San Mateo, California-based company that oversees about $660 million in assets, including GE shares. Eventually we'll see the new equipment orders come back, but it's been the service revenue that has kept us comfortable.
One key remaining risk is how much additional money the conglomerate will have to pump into its GE Capital finance arm in the coming years. GE officials have told investors they expect to inject $2 billion into GE Capital in the first quarter of 2011, though Deutsche Bank analyst Nigel Coe wrote in a note to clients that he is wary that number could rise.
Still, with GE expecting to end 2010 with more than $25 billion in cash, it would be well positioned to meet any additional funding needs.
GE executives have said their first priorities for that cash pile are to buy back the preferred stake in the company sold to Warren Buffett's Berkshire Hathaway Inc
The company does not expect to lay out much of its cash for big acquisitions. While it will continue to do reasonable sized deals, from a couple hundred million to a couple of billion dollars, Immelt said in January he believed large acquisitions would be unlikely.
Instead, the company is working on closing a large sale, of a majority stake in NBC to No. 1 U.S. cable operator Comcast Corp
(Reporting by Scott Malone, editing by Dave Zimmerman)