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Tickers in this Article: GE, BSC, LEH, JPM
General Electric (NYSE:GE) missed earnings on Friday, which was surprising to all investors and even the company's management. The global conglomerate is often seen as a representative of the health of the entire economy, and it's one of the 30 stocks of the Dow Jones Industrial Average. GE's miss not only brought down its stock, but it took down the entire market as well. It was a very disappointing quarter, but that doesn't mean the stock should be abandoned.

Turbulent March Sends GE Off-Track
GE reported earnings from continuing operations of $4.4 billion, or 44 cents per share. This was well below the consensus analyst estimates of 51 cents per share, and the 50-53 cent range that GE had forecast for itself. GE also lowered 2008 earnings per share forecast to $2.20-2.30 per share, which would indicate 0-5% growth.

News from many companies will influence the market, but GE is on a different level. Its own stock fell nearly 13% or $4.70 per share, and helped to bring the DJIA down 256 points or 2% on Friday April 11, and took the broader S&P 500 down a little more than 2% as well.

GE almost never misses its own forecasts, so this was clearly not a good sign for the markets. With how influential GE is, the news left many, including myself, asking why GE's management didn't pre-announce that the company was having problems.

As far as Wall Street knew, CEO Jeff Immelt was going to report everything was fine at the global company, but instead he reported the dreaded miss. The reasoning for not reporting problems ahead of time, was that the problems started late in the quarter and took the company off its track very recently. The Bear Stearns (NYSE:BSC) collapse locked up the markets so severely in March that it had a significant impact on GE Money, the company's banking arm. (To learn what to do when a stock delivers a nasty surprise, check out Surprising Earnings Results.)

Rare Misstep
Jeff Immelt said that the best practices for management would be to reduce the effect of an event like this by pre-announcing the problem, and helping to smooth out and minimize a slide in the shares. The fact that there was no such announcement, and that up until recently Immelt said everything was fine, shows that GE was clearly taken by surprise.

You cannot blame them, the Bear Stearns situation surprised many and sent waves through the markets. The main issue at play is that Bear Stearns had the ability to hurt GE in the first place. This is worrisome for any prospective or current investors in the shares. The thing to look at now is, will this keep affecting GE, and can another bank instill more damage? The Bear Stearns problem was quickly remedied, with the Fed and JPMorgan Chase (NYSE:JPM) acting quickly to prevent Bear's assets from spilling onto the markets. That specific issue will not be a problem. The next issue is whether another bank can suffer the same fate and pull down the markets and GE with it. It is possible but with some of the actions of the Federal Reserve, including allowing primary brokers to access the discount window, I think it is much less likely. Lehman Brothers (NYSE:LEH), a company that many thought was the next to go after Bear, looks to be in stable condition now.

Prey On The Fallen
GE's quarter was nasty, and I was not surprised to see the market pummel the stock. Using GE's 2008 forecast, and Monday's closing share price of $31.75 the company is now trading around 12-times forward earnings. If we hit a light recession, one that lasts around six months, GE could come out and do better than it is now forecasting. There are risks that another outside problem could hurt GE's business, but I think the stock is now a bright long-term future. GE is in a great position to take advantage of a world turnaround, including taking part in the global infrastructure boom. There is value in the shares now and I feel the stock will perform well when the dust clears.

The Bottom Line
GE surprised the markets with a rare earnings miss. Immelt claimed that the company was hurt by the Bear Stearns issues late in the quarter, and could not let investors know earlier. I think that the company's shares were beaten down enough on Friday to create an opportunity. GE has a strong, diversified business, and some of the problems in the markets that caused the Bear Stearns issue are currently being alleviated by the Fed's actions.

To learn if these giant companies are right for your portfolio, check out Conglomerates: Risky Proposition?

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