Bad Timing on GE In The Wall Street Journal

Sometimes you just have bad timing. Wall Street Journal writer Scott Patterson must be shaking his head after writing this piece in the Friday (morning) print edition of the paper,

"Investors Are Missing GE's Energy Gusher

General Electric's stock has languished for years, mostly due to concerns about the company's huge financial arm. Investors should start to focus on another side of GE: energy.

GE's first-quarter earnings report Friday should show how the company's energy exposure is helping it weather the U.S. slowdown. Analysts surveyed by Thomson Financial expect GE to post earnings of 51 cents a share, up 16% from a year ago.

The lion's share of GE's growth in recent years has come from its energy-centric infrastructure unit, which does most of its business outside the U.S. GE's revenue outside the U.S. gained 22% in 2007 from the previous year, according to Morningstar, driven by a 23% gain in its infrastructure segment. That compares with a 6% increase in the U.S.

Its energy revenue, including financial services and oil and gas, totaled $31 billion last year. Sales of steam and gas turbines, nuclear power equipment and alternative energy products have boomed as oil prices shot to record highs.

GE's stock hasn't seen nearly the same strength that other energy firms have seen. As energy stocks have soared, GE is down nearly 30% since 1999.

It has been trimming its financial assets, shedding several consumer-finances businesses. It also hasn't seen the subprime turmoil that has plagued Wall Street's large banks.

"I don't think GE is nearly as exposed to the general credit problems that we've been seeing in other financial stocks," says Richard Tortoriello, Standard & Poor's stock analyst.

Perhaps it's time for Wall Street to shift its focus."

Of course, we all now know that later that morning, before the market open, GE announced a very surprising first quarter earnings of $4.3B, which was less than its year-earlier $4.57B, and eight cents per share lower than the sell-side analysts who follow the company were expecting.

What's worse, for Patterson's accidental bad timing, GE had not just broad weakness in its operations for the quarter, but an unexpectedly bad performance at its financial unit. The very unit which an S&P analyst quoted in Patterson's piece thought would be less exposed to credit problems than other companies with financial service components.

It's really sort of funny, when you think about it. What were the chances that Patterson would recommend that investors consider buying GE because of its buried energy-related potential, only to see its financial services unit deliver a poor performance on that very day that ruined the diversified conglomerate's earnings?

Of course, as I've written in many prior posts, such as this one, in December of last year, such disappointments wouldn't occur if GE were split into its very separate pieces. The company plods along, lagging the S&P's return under CEO Immelt's reign, because it is a smoothed-over combination of very different businesses, some fast-growing, and some not.

As I wrote in that prior post, this passage beginning with a quote from a WSJ article,

""With half its revenue coming from abroad, many of GE's businesses, notably infrastructure, are still going full steam."

Doesn't this beg the obvious? If some GE units are 'going full steam,' maybe they should be spun off as a separate entity, in order to give shareholders something that can outperform the market while King Jeff I reigns supreme at the closed-end mutual fund cum diversified industrial conglomerate."

Perhaps a better conclusion for Patterson's Friday column would have been, rather than suggest investing in the current GE, to wait for its breakup, the better to benefit from owning its energy-related businesses as a pure-play equity all its own.