GE Earnings Preview: GE Capital Services Holds the Key

General Electric GE earnings preview
General Electric GE earnings preview

Remember the General Electric slogan, "Gee, no GE"

That about sums up Wall Street's expectations for General Electric (GE) when it reports its first-quarter results Friday morning. The industry titan is expected to post a soft quarter and provide an improving outlook, in which analysts are still wary of its General Electric Capital Services (GECS) bogeyman.

For the quarter, analysts forecast the company to report earnings of 16 cents a share on revenues of $37.1 billion, according to Thomson Reuters. Wall Street has gotten a little more optimistic over the past three months, as analysts have pushed GE's consensus estimate up by a penny.

But compared to last year, the expectations are far less than when GE posted net profits of 26 cents a share on revenues of $38.4 billion.

Emerging from the "Trough Years"

"Investors should look for stabilization in their story when they report tomorrow," says Nicholas Heymann, a Sterne, Agee & Leach analyst. "There should be less unusual or exceptional items or special charges."

GE is emerging from its "trough years" and needs to instill investor confidence that its earnings will be normalized by the time 2012 rolls around, Heymann adds. By then, GECS should be off its diet of government tax credits, and financial regulatory reform should be completed, he notes.

As one first-quarter guidepost, investors should be concerned if GECS's losses and impairments surpass the company's projections of $13 billion to $19 billion.

Wrote Scott Davis, a Morgan Stanley analyst, in a research note: "GE's estimated 2010 GECS losses/impairments of $13-19B seems realistic to us and may prove too high as delinquencies level out. We have had a forecast for the past 15 months that GE is likely $15-20B under-reserved versus bear forecasts of $50+. GE's forecasts now appear to be closer to our levels." Commercial real estate remains the biggest risk in the portfolio for GE's capital finance, according to the Morgan Stanley note.

A Likely Lineup of Results

Here's a rundown of how GE's main business segments are expected to perform, according to a research report by Nigel Coe, a Deutsche Bank analyst.

  • Energy Infrastructure: revenues $9.2 billion, up 1.4% from a year ago with oil and gas key contributors. Income is expected to grow by same percentage, with revenues rising to $1.3 billion.

  • Technology Infrastructure: revenues $9.1 billion, down 4.1% due weakness across all its businesses except health care. Income drops by 11.9% to $1.5 billion, largely due to a one-time gain in its aviation unit a year ago.

  • NBCU: revenues $4 billion, up a robust 13.4% due to the Winter Olympics. But the Olympic also likely cost NBCU a loss of $200 million, leaving that business with a 60.8% decline in income to $153 million.

  • Capital Finance: revenues $13.1 billion, down 5.1% as financing receivables decline and commercial lending and leasing assets earn lower returns. Income is expected to drop a sharp 71.2% to $296 million, largely due to a lower tax benefit.

  • Home & Business Solutions: revenues $2 billion, up 3.9% as consumer and general industrial markets show some modest improvement. Income is expected to soar $128.4% to $103 billion, but that's due to a weak quarter to compare to - in other words, a low bar to hurdle.

Advised Coe: "The key positive should be increasing confidence in a sharp GECS profit recovery in 2011/12."