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

Innovations Driving Growth at General Electric and Proctor & Gamble

General Electric (NYSE: GE) and Proctor & Gamble (NYSE: PG) (P&G) are two of the top 18 Innovators in North America representing the The Innovation Index list of companies. GE stock is even for the year and down 11% since the new CEO took charge, while P&G stock is up 9% for the year and is near its all time high. Fortune magazine interviewed the CEOs of these two innovators in the December 2006 issue. GE has a daunting revenue challenge each year: create $15 billion or higher in new business each year or about the size of Nike's total revenue; on the other hand P&G needs to carve out $7 billion in new business each year, comparable to IAC Interactive's total revenue. Large numbers indeed. Fortune article explores in-depth on how these companies create innovations driving growth in the billions of dollars each year.

Selected references:

Leading eBook on Creativity and Innovation in Business

Creativity and Innovation Best Practices

Creativity and Innovation Case Studies

The Innovation Index

Top 50 innovative companies in the world

What drives this new business growth at GE and P&G?

GE's CEO Jeffrey Immelt and P&G's CEO A.G. Lafley focus on "growth" and "sustained excellence" that create new innovations in technologies, products, leadership and globalization -- key ingredients for new revenue growth.

The strategy at GE emphasizes sound business processes driving creativity and innovation, and is rooted on the following three pillars:

1. Focus on key technologies:
"Immelt wants GE to "own" certain technologies -- renewable energy, energy efficiency, nano-technology" and applications in medical imaging. GE wants to capitalize on the emerging market trends and assume leadership in those it goes after.

2. Growth-oriented leadership:
"After a study of fast-growing companies, GE managers are now evaluated on five criteria -- external focus, decisiveness, inclusiveness, risk taking, and domain expertise." This has the making of an innovation factory that encourages calculated entrepreneurship led by domain managers while taking into consideration company policies and processes.

3. Business portfolio:
"Immelt has jettisoned much of GE's insurance business, while bulking up in health care, water, security, and other areas." GE wants to focus on the core businesses where it is in the position of market leadership, and position itself for organic growth.

There are similarities between the Innovation strategies of GE and P&G. For instance both companies have divested non-core businesses. Both emphasize strong leadership and innovation accountability. Both are focused on new products driving current and future growth.

The strategy at P&G is buoyed by the following three pillars driving new innovations:

1. Brand mix:
"Lafley has divested such stalwarts as Crisco, Jif, Pert Plus, and Sure, while spending big to buy Clairol, Wella and Gillette (including Braun and Duracell)." The driver at P&G is focus on the core and the critical few products that create pervasive, global brand and market leadership.

2. Global top team:
"P&G does more than half its business outside the U.S., so Lafley has recast his top executive group to be 50% non-American." P&G has taken bold steps to talk the talk and walk the walk by making it a truly global multi-national company thereby driving growth internationally.

3. New products:
"Lafley has shifted P&G's focus from inventing all its new products to developing others' inventions at least half the time." For instance, Mr. Clean Magic Eraser was successful because of a product found in an Osaka market. Do you buy, build or partner to create new innovations? P&G does all of the above, but has also gotten smarter on leveraging existing ideas and inventions from partners and turning them around on a dime to create new markets.

In a Q & A with senior editor Geoff Colvin, P&G CEO Lafley had this to say on Innovation:

"We've got to grow market shares and move into adjacencies and create new categories of business. So the name of the game is innovation. We work really hard to try to turn innovation into a strategy and a process that's a little more consistent, a little more reliable, so that we can build a portfolio of innovations and the yield we need to get that $6 billion or $7 billion a year."

GE CEO Immelt agrees with Lafley on the core principles that drive growth and innovation. He adds: "It's important to make growth a process...Just like A.G (Lafley), I want a pipeline of innovation. Some projects will fail. But the goal for a company like ours or P&G is using size as an advantage. Most people just assume that big companies are slow and lethargic, and only a small company can grow. But if you get good processes, you can make size an advantage."

Both Lafley and Immelt believe that "narrowing the focus makes a difference." Rather than doing too many projects at once (read few dozen), their companies focus on key innovations in markets that they can literally own (less than a dozen). Further, R&D and Leadership centers are distributed globally and reengineered to take advantage of the new technologies and global business trends. And in particular, new global partnerships are formed to co-create innovations. Lafley admits: "We did have to kill not-invented-here. We have to make 'reapplied with pride' just as important a part of the culture as 'invented here.'"

In response to globalization and competition, and its impact on the economy, Immelt argues that "it's all about innovation and technology." He gives an example of the jet engine business at GE, where GE is the world market leader, and spends $1 billion annually on R&D. Immelt states that "we can go toe to toe with anybody, and we'll be able to do that for a very long time." However, in other areas such as appliances, he believes that GE has to take steps to make profits and hence manufacture overseas. The key though is readiness, willingness and motivation to compete for the future according to Immelt. Lafley adds that both companies offer retraining, early retirement, and employee benefits to provide best opportunities to employees who get impacted by globalization. And at times Lafley believes one needs to be creative in dealing with this area.

GE and P&G are two of the top 18 innovators in The Innovation Index. Together, they do over $230 billion in annual business, a number larger than GDP of many countries of the world. And yet, they must find new ways of innovation to grow at least 10% each year, or add about $23 billion in new revenue. Leaders Immelt and Lafley provide us the blueprint of creatvity and innovation that drives huge revenue growth each year at their companies.

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

References:

Fortune Magazine: Lafley and Immelt: In Search of Billions