Filed Under:
Tickers in this Article: HON, GE, CAT, UTX
Several days ago many of us were convinced General Electric's (NYSE:GE) woes were a sign that all the major industrial players were headed for hard times. Then, Honeywell (NYSE:HON) and Caterpillar (NYSE:CAT) stepped in to force us to rethink whether General Electric was truly a market proxy.

After some deeper digging, I view GE's troubles as an anomaly. Moreover, I see good opportunities in the nearest competition. As usual, results and plausible forecasts tell the story.

Why Did GE Fall Short?
A couple of weeks ago, General Electric fell short of its quarterly earnings expectation; analysts were looking for 51 cents per share, while the company reported 43 cents per share. Income dipped by 6% on a quarter-over-quarter (QOQ) basis.

GE's business lending business got most of the blame for the shortfall. Problems with the credit market - surprise surprise - were cited.

Check the fine print. Yes, the financial services divisions did create some problems, but that was hardly the only one that fell short. GE has six divisions, and four of them fell short of the plan. Earnings for Infrastructure and NBC Universal were higher, while the Healthcare, Commercial Finance, GE Money, and the Industrial units turned in lower profits.

Point being, Commercial Finance wasn't the only problem. Taking that division out of the equation altogether would have still led to a decline in income. (To learn how to break down the balance sheets of mega-companies, check out The Importance Of Segment Data.)

If you had come to the same conclusion that many other investors did, you would have assumed the worst for all the general industrial companies. A tepid economy just meant these stocks were going to suffer, particularly those relying on international sales. As it turns out, it wasn't a bad environment, it was just a poorly-performing GE. Industrial stocks seem to be doing just fine, and actually seem to be viable opportunities for investors. Honeywell and Caterpillar immediately come to mind.

What Honeywell and Caterpillar Did Right
I'll cut GE some slack for its lending division's problems - the credit market really does stink right now. However, it doesn't excuse the poor results from other divisions, especially when the competition seems to be doing just fine in the same environment.

Take Honeywell for instance. The company increased profit by 22% during their first quarter (QOQ) reaching $643 million; all four of its divisions grew. The company even raised its 2008 outlook.

Caterpillar did well in Q1 too; earnings increased by $106 million to $922 million or 13% in Q1 (QOQ). What's most interesting about Caterpillar's official statement was its acknowledgment that demand from United States was soft right now, yet it still managed to put up bigger quarterly top and bottom lines anyway.

Then there's industrial giant United Technologies (NYSE:UTX). The company saw its first-quarter profit jump 26% (QOQ).

And things are supposed to be bad?

Looking Ahead
Here's the litmus test. How will GE perform when the credit crisis is over? As stated above, even taking the lending part of the business away (and leaving the infrastructure/industrial units in the equation), GE still saw a decline in earnings.

Is it just the environment? Maybe, but doubtful. Caterpillar, United Technologies, and Honeywell seem to be doing fine. Weak dollar? Same story. General Electric, Caterpillar, United Technologies, and Honeywell all have an international market presence. The latter three have taken advantage of what should be a great opportunity for overseas sales. General Electric was left behind.

Based on what we've seen here, perhaps GE just isn't all it's cracked up to be in a post Jack Welch world. Maybe the company is just misfiring, as comparable companies don't seem to have the same problems. The trouble is, it can take a while to turn a big boat like GE around. I'll take a United Technologies or Honeywell in the meantime.

For more on the tricky valuations of huge companies, read Conglomerates: Risky Proposition?

comments powered by Disqus

Trading Center