Silver Lining In GE's Disappointing Earnings and Guidance

GE (NYSE: GE) announced the "first quarter 2008 earnings from continuing operations of $4.4 billion with $.44 per share, down 8% from first quarter 2007. First quarter 2008 net earnings were $4.3 billion or $.43 per share, down 2% from first quarter 2007. First quarter revenues from continuing operations were $42.2 billion, up 8%."

GE is one of the Top 20 Innovators of The Innovation Index.

"Demand for our global Infrastructure business remained strong, but our financial services businesses were challenged by a slowing U.S. economy and difficult capital markets," GE Chairman and CEO Jeff Immelt said. "While we are disappointed with our results, the fundamentals of our businesses are strong."

"Infrastructure had a solid quarter, growing revenues 23% and earnings 17%," Immelt said. "Oil & Gas, Energy, Transportation, and Aviation all generated double-digit profit growth - with no signs of slowing. Infrastructure orders increased 12%, and we added more than $3 billion in backlog since last quarter."

Total orders were $24 billion, up 8%. Major equipment orders grew 11% to $12 billion. Major equipment backlog was at $52 billion, an increase of 41%. Services orders were up 5%, and CSA backlog stood at $110 billion, an increase of 16% year-over-year.

"Our focus on globalization has helped sustain the Company during the U.S. slowdown. Global revenues grew 22%, with strength in virtually every business," Immelt said. "Developing country growth was 38%, and 14% in developed countries outside the U.S.

"Nevertheless, we failed to meet our expectations. Our primary shortfall was a decline in financial services earnings. We knew the first quarter was going to be challenging, but the extraordinary disruption in the capital markets in March affected our ability to complete asset sales and resulted in higher mark-to-market losses and impairments," Immelt said. "Our inability to complete these asset sales and higher mark-to-market losses and impairments impacted earnings by $.05 per share versus plan.

"Commercial Finance and GE Money remain in good shape and still earned $2.2 billion in a tough market. Our balance sheet is strong, portfolio quality is stable and we are originating business at high margins.

"Our other industrial businesses had mixed performances. NBC Universal grew segment profits 3%, for its sixth straight quarter of profit growth," Immelt said. "In the Industrial segment, we had strong performance in Enterprise Solutions, with profit up 15%, partially offsetting a difficult U.S. appliance market. Healthcare earnings were impacted by a difficult U.S. environment and continued regulatory shipping restrictions on the surgical supplies business.

"In light of what we have seen in the first quarter, we have revised our earnings outlook for the full year to protect investors by reflecting a slower economy and assuming capital markets remain challenging," Immelt said. "We are lowering our full-year EPS guidance to $2.20-2.30 from continuing operations reflecting growth of 0-5%. As a part of this guidance, we expect our industrial earnings to grow 10-15% and financial services earnings to decline 5-10%. This range encompasses any portfolio actions we have announced. Consistent with this range, our second quarter 2008 guidance is $.53-.55 EPS." - GE Press Release

Bottomline:

While GE disappointed every investor with the shortfall in earnings and the lowered future earnings outlook, if one believes in GE's longer term business growth, corporate governance, and global leverage, GE is quite possibly the best bellweather out there. What is the silver lining? There are many positives in GE's earnings report: GE's total revenue was up 8%, strong demand for global infrastructure, rise in total orders, and substantial increase in major backlogs. If you are a GE believer, and make an assumption that U.S. economy improves in the second half of 2008, GE might just surprise the investors in the 3rd and 4th quarter of 2008 - positively.

Innovation Index Group, Inc. has a BUY rating on GE with Q4, 2008 price target of $40 to $45.

About Innovation Index Group:

Innovation Index Group, Inc. is a new investment management company focused on systematically identifying, tracking and investing in the most innovative publicly traded companies in North America – collectively called the Innovation Index. We have developed the Innovation Index Fund, LLC as our first vehicle to invest in the Innovation Index. Over the past six years, the Innovation Index has generated a gross average annual return of 40%.

Innovation Index Group, Inc. and Innovation Index Fund LLC are registered California Corporations, and member of the Irvine Chamber of Commerce in Orange County. Further, Innovation Index Fund LLC is a private placement investment partnership organized under the California state regulations.

The Innovation Index Reports:

Invest in The Innovation Index - Innovation Index Fund tracks The Innovation Index
The Innovation Index closes 2007 at 66% - 2007 Annual Report on the Innovation Index
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Innovative Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index returned 66% in 2007, and returned 174% over the previous five years (2002-2006). This assumes equal investment in each stock of The Innovation Index as of December 31, 2001. An average of $100 invested in The Innovation Index on December 31, 2001 returned $454 as of December 31, 2007. By comparison, $100 invested in S & P 500 returned 28% or $129, $100 invested in NASDAQ returned 34% or $136, and $100 invested in the Dow Jones Index returned 30% or $131 through December 31, 2007. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by more than seven times over the past six years.*

Alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)

The Innovation Index will analyze the positions and standings of the Top 20 Innovators at the end of each year. For 2008, there will be no further changes in The Innovation Index.

Disclaimer: The Innovation Index Group, Inc. invests in the stocks comprising The Innovation Index.
*Past Performance Does Not Guarantee Future Results

References:

GE Press Release