GE offers ray of hope for industrials

By Nick Zieminski - Analysis

NEW YORK (Reuters) - A strong near-term outlook for General Electric Co's (GE.N: Quote, Profile, Research, Stock Buzz) industrial portfolio offers a ray of hope for beaten-down U.S. manufacturers, but leaves the longer-term outlook no clearer than before the credit crisis.

While GE reported a drop in overall earnings in the latest quarter, led by sharply lower profit in its finance operations, profits rose at its infrastructure arms, where orders and backlog grew.

Infrastructure accounts for about half of GE's earnings this year, with services making up the bulk of it. Equipment sales could face pressure from lack of financing or lower demand, GE said, but it listed several mitigating factors.

Its case for cautious optimism rests first on its backlog: $170 billion at the end of the third quarter. GE also benefits from reliance on high-margin services, which are more resilient during economic volatility, and from its global diversity, Chief Executive Jeff Immelt said on a conference call.

Orders accelerated and the company said it expects its energy infrastructure unit to post a 15-percent profit increase in the fourth quarter. It is expected to detail its 2009 outlook in December.

"For the near term, we feel reasonably confident about our backlog and we'll have to watch the global markets as they progress," GE Chief Financial Officer Keith Sherin told Reuters.

"We haven't really seen that impact us on the long cycle businesses yet. Near-term deliveries of equipment for us are for projects that are already financed and well underway."

Goldman Sachs analyst Deane Dray called GE's industrial revenue and backlog "reassuring," but said it was too soon to turn bullish on the company.

GE said cancellations in infrastructure are running at a "normal" pace, with only the healthcare technology business seeing an impact from the credit crunch, as some hospitals consider delaying projects because of a lack of funding.

"People think infrastructure would be hurt by credit problems, but it hasn't been," said Morningstar analyst Daniel Holland. "The backlog is actually stronger than last year, which makes you think it'll hold up for some time."

"NOBODY CARES"

But many investors have been unwilling to find out how well the backlog holds up, pushing GE shares to an 11-year low.

They have dumped industrial names with the same ferocity as the rest of the market. A Standard & Poor's index of industrial names .GSPI is down 44 percent from its peak a year ago, about matching the performance of the broader market. The industrials index was down about 7 percent in afternoon trading, with GE down about 2 percent.

Other bellwether names -- including Caterpillar Inc (CAT.N: Quote, Profile, Research, Stock Buzz), Emerson Electric Co (EMR.N: Quote, Profile, Research, Stock Buzz), Tyco International Ltd (TYC.N: Quote, Profile, Research, Stock Buzz) and United Technologies Corp (UTX.N: Quote, Profile, Research, Stock Buzz) -- were also trading at multiyear lows.

"Companies that are levered to the global infrastructure build are just getting hammered by 5 and 10 percent a day," said Brian Langenberg, principal with Langenberg & Co.  Continued...