Thursday, January 22, 2009

GE @ $13.48




GE's earnings report is coming out early tomorrow morning (8:30am) and people are looking for management guidance regarding their earnings.

I think people who are pushing for earnings guidance outside of 2010 are being unreasonable when management says the outlook is uncertain.

However, I also think that GE is in a great position to take advantage of the infrastructure investments by the government intended to stimulate the economy. Especially in green power, GE has a great advantage in wind energy (solar isn't really all that green yet... the energy consumed in oil used to produce a solar cell is disproportional)

I think that the earnings report will be dim and will probably take earnings down.

Rating:
Buy @ $10.50 (number to be reviewed pending outcome of tomorrow's call)

3 comments:

Anonymous said...

GE allegedly smooths out their earnings, but with major stock and asset declines in the past quarter, they may have trouble using this "tool" to hit their target... http://books.google.ca/books?id=05zmpvqj-M4C&pg=PA56&lpg=PA56&dq=ge+income+smoothing&source=bl&ots=Wm0EYlYN6W&sig=6BmaaESyVDi42EvAxFQ9tKdVKrU&hl=en&sa=X&oi=book_result&resnum=6&ct=result

Wong said...

That is an interesting point. The book points out that GE writes off under performing assets when they have sales gains on others to have a more net neutral effect and income smoothing.

Although this can be misleading, a smart analyst will scrutinize the Other Income portion of an balance sheet and earnings statement (note different rules for IFRS versus US GAAP). From there, they can determine the "real" gains derived from the performance of the business rather than non-reoccurring events such as selling (or acquiring) assets at a loss (or gain).

For instance, as Potash reported earnings today, analysts were putting the numbers under a microscope. An analyst at Goldman mentioned that although the actual earnings was $2.56, they suggested that there should be a discount for a 53c tax benefits mentioned in the financial statements.

Wong said...

Also note a key point regarding the Potash example: The consensus estimate for earnings was around $2.28, so not only is the 53c difference significant in terms of size, but it also affects whether or not you think Potash met expectations.