Our GE Thesis Holds Tight

 General Electric (GE) delivered third-quarter earnings of $0.22 per share, in line with our expectations. After adjusting for the one-time impact of redeeming the Berkshire preferred shares, earnings grew 11% to $0.31 per share. Internal orders grew 6% in the quarter, supporting a backlog of $191 billion, giving us confidence in the firm's ability to grow in the future. Management expects double-digit earnings growth for 2012, one of the few industrial firms to express such conviction at this stage of the cycle. This is in line with our thinking, given the late-cycle nature of GE's end markets and strength in GE Capital. Our long-term thesis is intact, and we maintain our fair vale estimate of $25 per share.

Weak pricing in the wind business continues to pressure energy margins, despite encouraging growth out of the thermal energy and oil and gas businesses. The company said energy will begin to see earnings growth in the fourth quarter after being a drag on earnings for the first three quarters of the year. While profitability in aviation fared better than our initial expectations, the weakness in health-care profitability and declines in the home and business solutions business offset any additional gains.

GE Capital turned in another solid quarter, with earnings growing versus the prior year due to lower provisions and lower losses on commercial real estate. Ending net investment was down 4% versus the prior year, with all of the reduction coming from lower exposure to noncore assets, offset somewhat by investments in commercial lending and leasing. The plan to start sending the GE Capital dividend back to the parent company in 2012 is still in place, which should further strengthen the cash position at the parent company.

On Monday, GE redeemed the Berkshire Hathaway preferred shares, which should provide $0.03 per share of earnings improvement in 2012. Additionally, GE repurchased $1 billion of stock in the quarter, bringing the total repurchase amount to $3.7 billion since the third quarter of 2010. Management restated its commitment to the dividend, and we expect a modest dividend increase announcement in the coming months.

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