GE's ugly earnings

General Electric (GE) managed to surpass muted quarterly expectations, but industrial businesses showed signs of weakness and the company issued downside guidance.

Combined earnings at GE’s non-finance businesses fell 8% to $4.16 billion and CEO Jeffery Immelt said the combined earnings of these businesses will come in at the low end of the guidance range (flat to 5% growth) given in December – thanks Jeff, we couldn’t have figured that one out ourselves. The company also adjusted their full-year free cash flow forecast from $16 billion to a range of $14 billion to $16 billion after only generating $7.1 billion in free cash flow from operating activities through the first two quarters of 2009.

GE’s overall order backlog dropped 1.7% from a year ago to $169 billion, but the backlog for higher-margin maintenance and services contracts increased. The company added they are targeting more than 400 stimulus projects valued at $200 billion worldwide. Few of these projects have been realized so far this year, but management expect an increase in the second half of 2009.

Operating margins improved by 140 basis points within the non-finance businesses, primarily due to an increase in services revenue. And with about $2 billion of additional cost reductions under consideration for this year, GE has plenty of levers to pull if revenues continue to plunge.

GE Capital reported profit of $590 million, down from $2.9 billion a year earlier, as consumer credit deterioration weighed on performance. The finance unit’s pretax profits fell 40% from a year ago, but increased 15% sequentially. Pretax profits are important to some investors because of tax credits that often bolster profit. Management reiterated that the finance arm remains on track to be profitable for 2009.

The company has reached its 2009 long-term funding goals for GE Capital and noted that the company has pre-funded about a third of its 2010 target, which means GE Capital could wait almost a year before having to access the capital markets again. This gives them a substantial cash balance right now, which is a positive when you consider the crunch that other wholesale-funded banks like CIT Group have faced.

There is no sugar-coating it: GE had an ugly quarter. Trading just under 12 times earnings, it is hard to imagine that an improvement will justify a higher multiple anytime soon. In the meantime, GE investors need to be patient and hope they continue to receive the 3.5% dividend payout until the economy climbs out of this rut.

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Peter J. Lazaroff