Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. General Electric reported first-quarter results that were roughly in line with our expectations. I'm here with analyst Daniel Holland to talk about the quarter, and to see what the future holds for GE. Daniel, thanks for joining me.
Daniel Holland: Thanks for having me, Jeremy.
Glaser: So anything in this quarter that stood out to you as particularly interesting?
Holland: I guess it's more the same drum beat that the company's had. Industrials still continues to plod along through the recession. Orders are starting to improve. Health care is improving, as well. And you start to see that Industrials is shaping itself up into a nice core infrastructure type company.
On the other side, the one thing that interests me, is that GE Capital posted a pretax profit for the quarter. And it's the first time in a number of quarters that the segment's been able to do that. In addition, you're starting to see pretax, pre-provision incomes, starting to continue to move upwards, which is a really good sign given that the company's asset base is shrinking at the same time.
Glaser: So what's that mean for profitability?
Holland: Profitability for GE Capital is going up. You're starting to see lower provisions, which automatically just keeps pushing earnings back up for the segment. Eventually, it will help GE Capital maybe return its dividend to the parent company, probably by 2012 or so.
Glaser: So, looking forward to the rest of 2010, where do you see some of the opportunities for GE are?
Holland: The opportunities within GE's industrial business, as a recovery continues to take hold, you're going to see more energy demand and demand for electricity. And that really gives a big boost to GE's energy platform, selling more gas turbines, steam turbines, wind turbines, things that just generate electricity.
At the same time, with the cloud of health-care reform kind of past us, irrespective of whether or not, what the impact might be to business, just the removal of uncertainly helps people make decisions about what to buy in the health-care space. That really helps health care a fair amount. So you're looking at some pretty good news, or positive events, going forward for GE's industrial segment.
Glaser: What scares you most about the prospects for the business?
Holland: The one thing that keeps me held back is just the exposure to commercial real estate on the capital side. The one thing that didn't really happen in the quarter, that I thought might have taken place, is the company just continued to reduce its exposure to commercial real estate. And, really, the portfolio stayed essentially flat in the quarter, which I would have expected to see more asset sales.
To me, that signifies that the market is still pretty tight, and pricing isn't where the company wants to actually execute a transaction. Meaning that the company is going to have to continue to slug through more losses in commercial real estate, until that market improves.
Glaser: Speaking of sales, GE has a lot of planned divestitures over the next year. What do you think they're going to do with all of that cash?
Holland: Well, the company has alluded to a raise in the dividend, here in probably 2011, which I think is excellent for shareholders, given that the company slashed it last year. By the end of this year, they're going to have probably over $25 billion of cash on hand, which is over $2.50 a share. You raise the dividends in line with earnings, and you see the potential for both accretion through a buyback and a dividend raise.
So the company has a lot of different options to deploy capital. Right now, I just don't see acquisitions being a really big part of it. Since there aren't many gaping holes in GE's industrial portfolio.
Glaser: Finally, what do you think about the valuation of the shares right now?
Holland: Right now, GE shares, they've risen up a fair amount, over the last couple of weeks here. Our fair value estimate is $25 a share. So I still think that there's room for the company shares to improve. So I think that they're still relatively cheap, but it is a 3-star stock at this point.
Glaser: All right, Daniel, thanks for talking with me today.
Holland: Thanks for having me.
Glaser: For morningstar.com, I'm Jeremy Glaser.