Lower orders cloud long-term GE outlook

By Nick Zieminski – Analysis

NEW YORK (BestGrowthStock) – A healthier world economy is not yet translating into one area of General Electric Co’s (GE.N: ) business where investors might expect it: orders.

The global conglomerate, whose wide range of industrial products is keyed to global growth in infrastructure and energy demand, continues to report lower orders for expensive capital equipment, from jet engines to electricity-producing turbines.

That is raising fresh questions about where growth will come from at a company whose shares have tripled from their recession lows, and whether expectations about the pace of its recovery have gotten ahead of reality.

Orders have become a particularly important metric for GE investors since the Fairfield, Connecticut-based company stopped providing per-share profit guidance, instead offering Wall Street a “framework” of how it expects its various divisions to perform. GE officials have said overall profit may rise this year, with firmer growth seen in 2011.

GE, which reported better-than-expected quarterly profit on Friday thanks in part to a recovery in its beleaguered GE Capital arm, said first-quarter orders were down 8 percent to $17.1 billion. The number was weighed by more-than-20 percent declines in orders for energy and aviation equipment. Transportation orders were flat.

Service orders — which are more profitable for GE than equipment sales — declined just 6 percent, a less-sharp drop than the 10 percent decline in equipment orders.

Oil and gas and healthcare orders rose in the quarter — the latter helped by demand for diagnostic imaging equipment — but some GE shareholders noted GE’s outperformance this quarter was more a matter of cost-cutting than a matter of growth.

“I’m a little bit concerned about the pace of activity,” said Peter Sorrentino, senior vice president and portfolio manager with Huntington Asset Advisors in Cincinnati, Ohio.

“If the economy is picking up and we’re seeing an increase in exports, I would have thought we’d see a pickup in orders,” Sorrentino said. “If we don’t see a pickup in activity, the backlog is going to burn away.”

$174 BILLION BACKLOG

The drop in orders came as the company’s overall backlog held steady at $174 billion. The backlog could erode if it is not replenished by new demand. That perspective dampened initial enthusiasm over GE’s results, whose earnings per share beat by a nickel, even as revenue came in lighter than Wall Street forecasts. http://link.reuters.com/sad28j

“They didn’t expand their backlog. It was steady,” said Keith Goddard, co-manager of the Capital Advisors Growth Fund, which owns GE shares. “If anyone is going to find weakness here, it’s disappointment that the order book didn’t actually grow.”

To be sure, the rate of decline in new orders has slowed over the past several quarters, and GE’s Chief Executive Jeff Immelt told investors the company had a “strong pipeline of commitments” that it expects to translate into orders. Some Iraqi orders will appear in the second quarter.

Some GE shareholders say the company has turned the corner. The slowing order decline “foretells a better revenue picture down the road,” said Peter Klein, senior portfolio manager at Fifth Third Asset Management.

Now that GE’s finance business is improving, investors can once again focus on GE’s industrial businesses, said Jack De Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

“Clearly better times are ahead for GE,” De Gan said. “The confidence in GE as a company and the integrity of their financial model has been restored.”

QUESTIONING THE RECOVERY

Still, a key concern among investors is orders for services, a higher-margin business that accounts for three-quarters of the GE backlog.

During the downturn, GE and other industrial companies highlighted demand for services on capital equipment as an area of strength, as customers looked to extend the life of pricey machinery before committing to new purchases.

But at GE, such orders worsened sequentially from the previous quarter, said analyst Matt Collins, who covers conglomerates, aerospace and defense companies at Edward Jones in St. Louis. That partly reflects strong transport orders a year ago, but by highlighting that comparison, GE was making an excuse.

“Investors are writing off 2010 for GE,” he said. “Orders are what’s going to drive 2011 and 2012, and if we don’t see that turn positive and stay positive, that does limit the growth potential.”

Though overseas economies like China’s are rebounding strongly — China is growing at an annual rate of almost 12 percent — demand for capital equipment like turbines and locomotives is typically a late-cycle phenomenon, Collins said. Such demand may not show up for a while at companies like GE, United Technologies (UTX.N: ) and Emerson Electric (EMR.N: ).

“Investors were getting ahead of themselves in looking for a nice rebound,” Collins said. “This could be a slower, more gradual recovery.”

(Reporting by Nick Zieminski and Scott Malone, editing by Dave Zimmerman)

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Lower orders cloud long-term GE outlook