The Case for General Electric

Shares of General Electric (NYS: GE) have slumped in the days after CEO Jeffrey Immelt spooked Wall Street last Friday with his blunt assessment that "our margins hit a low for the year in the third quarter." Investors are wrong to penalize the conglomerate for this relatively minor setback.

Wall Street analysts may have been surprised that the Fairfield, Conn.-based company was "aggressively pricing" its goods and services. Similar worries were raised recently about a broad range of companies ranging from Eli Lilly to Harley-Davidson. Immelt, who said margins would rebound in 2012 as cost cuts and acquisitions bolster results, would have been stupid not to wheel-and-deal in these uncertain economic times. Evidence abounds that consumers and businesses remain as skittish as ever.

A recent survey of members of the National Association of Business Economists found that a whopping 84% of respondents are expecting gross domestic product to increase 2% or less from the fourth quarter of 2010 to the fourth quarter of 2011. That's up from 23% in July and is more pessimistic than the 2.7%-to-2.9% forecast issued by the Federal Reserve a few months ago.

There are many areas of strength at GE that the naysayers are overlooking, such as the fact that it has delivered six consecutive quarters of double-digit operating profit. GE also expects operating earnings per share to grow by double digits in 2012 with solid organic growth.

Shares of GE, which are down about 9% this year, are a compelling value. It trades at a price-to-earnings ratio of around 13, near where the stock has been for the past five years. The average price target for GE is $20.79, well ahead of the $16.08 level where it recently traded. As an added bonus, it pays a dividend that yields 3.6%.

Note of caution
One of General Electric's weak spots was in its Energy Infrastructure business, where segment profit fell 9% to $1.503 billion while revenue rose 30% to $10.86 billion, fueled by gains in the oil and gas business. Profit margin for the Energy segment fell 2.9% because of pricing in its wind business alone. But that should be a temporary hiccup. Wind turbine volumes will be up 35% in the fourth quarter, and gas turbines will be up 70%, according to CFO Keith Sherin. GE may also benefit from the regime change in Libya because billions will be needed to invest in the country's neglected oil infrastructure.

GE's aviation business performed well in the recent quarter, with revenue rising 10% to $4.83 billion and profit rising 7% to $862 million. The company stands to get some work from the $40 billion order that AMR (NYS: AMR) , parent of American Airlines, announced in July with Boeing (NYS: BA) and Airbus.

GE is not a stock for people desiring quick growth. However, its solid fundamentals and decent growth prospects make it a solid stock for the portfolios of many investors.

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At the time thisarticle was published Fool contributorJonathan Berrowns no shares of any of the aforementioned stocks. Follow him on Twitter, where he goes by@jdberr. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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