Our Take on GE's Fourth Quarter

 General Electric's (GE) fourth-quarter earnings of $0.37 per share were slightly below our estimates for the quarter. The shortfall was largely driven by an additional charge of $0.02 per share related to excess reserves necessary for GE Money's divested Japanese bank. Aside from that, the firm's results were in line with our expectations, and we maintain our fair value estimate at this time.

GE generated $27.1 billion of industrial revenue in the quarter, a 10.6% improvement relative to the prior year with only the consumer business declining. We are encouraged by the strength of energy revenue and orders in the quarter, though the weakness in wind is still having a negative impact on operating margins. The company expects for the wind business to be beneficial starting next year because of customers buying in advance of the expiration of the renewable energy tax credit.

The health-care segment was hit the hardest by the weakness in Europe, with revenue growing 1% but operating profits declining nearly 5% versus the prior year. While the result is disappointing, it was not unexpected given the weaker performance in the third quarter. Given that GE's primary competitors in the market are also struggling, we think GE will be able to hold and potentially improve its market share in the coming quarters.

Operations at GE Capital performed in line with our expectations. The company took a $197 million charge related to the GE Money Japan business sold in 2008. In 2010, the company had several consecutive quarters where it needed to take similar charges for the divested business, but we thought that trend had largely ended once the firm made a final adjustment to the reserve in the third quarter of 2010. Since claims continue to come in at rates higher than management expects, we will likely take a more conservative approach in forecasting GE Capital earnings.

As we expected following the December investor meetings, management has lowered the ending net investment target for GE Capital in 2012 from $440 billion to $425 billion. As management gets a better grasp for what truly is core and what the realistic opportunities for the business are, we think this number will continue to trend down over the coming years. As a consequence, GE Capital's contribution to total corporate earnings should also decline, a change that we welcome.

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