Many investors are desperately hanging on to the idea that the economy will spring back in the second half and validate the multiples in the market. When companies like General Electric (NYSE:GE) report earnings and give guidance that makes that second-half recovery look shakier, the stocks pay the price. While I understand short-term investors selling GE on disappointment over the company's outlook, the stock still seems too cheap from a long-term cash flow perspective.

Not Much Joy In The First Quarter
Probably the best that can be said about GE's performance in the first quarter is that investors weren't expecting a great set of numbers.
Revenue was flat as reported, with a 6% decline in industrial earnings (and a 20% sequential decline). While transport was strong (due in large part to an acquisition) and aviation was respectable, power and water saw a big decline (down 26%) on weak gas and wind turbine shipments. Healthcare, oil/gas, and home/business all flat-lined relative to last year.

GE Capital also continues to recover. Revenue rose 1% and beat expectations as growth in real estate, energy finance, and aircraft leasing offset declines in the commercial lending business.

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GE's profits were disappointing. Gross margin did improve slightly from last year, but industrial profits fell 11% for the quarter. Power and water was the big disappointment, as the margin declined more than three points, but healthcare and oil/gas were disappointing as well from a profit and margin standpoint. Given the weak volumes in these markets at present, these results aren't entirely surprising and I don't think GE is underperforming its peers.

Orders Look Alright, But What Will The Margins Look Like?
While GE management was more conservative with its guidance than the Street wanted, the company's order book looked pretty respectable. Orders were up 6% overall, while equipment orders improved 10% on big increases in oil/gas and aviation.
These numbers seem to make sense. Boeing (NYSE:BA) is trying to step up its production and trends in aftermarket aviation seem to be stabilizing. That should be a positive for GE, Honeywell (NYSE:HON), and United Technologies (NYSE:UTX). Likewise, while the energy sector is not healthy (and a recent decline in oil prices won't help), most equipment and service companies like National Oilwell Varco (NYSE:NOV) seem cautiously optimistic about 2013.
The big question, though, is what the margins on this business will look like. GE has done a good job of building its market share in markets like wind power, but industry-wide volume pressures could make it challenging for GE to outperform on margins in the short run.

The Bottom Line
If you're patient, I believe this is a good time to consider GE shares. The company's efforts to clean up and turnaround GE Capital seem to be working and I believe the company remains committed to an overall operating philosophy of “be the best, or be gone” with respect to its core end markets. Markets like aviation, power, healthcare, and oil/gas are all cyclical, but the long-term growth outlook for each of these markets is pretty strong.
Right now, it looks like the Street is betting that GE cannot/will not grow in line with global GDP. At a long-term free cash flow growth rate of 3% and a long-term ROE of 10% for GE Capital, fair value on GE would see to lie above $27 per share, while the stock trades for less than $22 as of this writing. While GE is not the kind of stock that is likely to double your money in six months, I believe patient long-term holders could do well buying GE at these levels, even if there are risks to the second half outlook and broader stock market.