Although concerns remain over debt issues, corporate profits have come in pretty strong over the past few days as the summer earnings season kicked off without a hitch. The news has been especially good for companies in the industrial sector as railroad operators such as Union Pacific and CSX both reported solid results while Halliburton and Mosaic rounded out the quality performances for major corporations this week. While these figures undoubtedly helped to boost spirits over the economy, many traders will probably look to the industrial sector’s biggest and most important name, General Electric, in order to truly confirm the upward trend.
General Electric (GE) is a $200 billion giant that finds its way into a variety of sectors across the industrial world ranging from airplane engines and wind turbines, to health care products and other more consumer oriented goods. GE is considered by many to be a pretty good bellwether for the health of the overall American economy and has been a key member of the DJIA for decades. However, the firm has run into some significant trouble over the past few years thanks to slumping demand for many of its key products and lackluster performance out of the finance division. Nevertheless, GE has come back relatively strong and has more than doubled since its low in early 2009. While the stock may have bounced back in 2009 and 2010, it has been pretty much flat in 2011 and has only just begun to trend back into the green in year-to-date terms. As a result, today’s earnings report for the company, which is due out before the bell, could have a huge impact on the short-term sentiment for this industrial juggernaut [see ETF Insider: Picky Bulls, Broad Bears].
Street analysts expect the conglomerate to report earnings of 32 cents per share on $34.7 billion in revenues, this compared to 30 cents in earnings for the year ago period on revenues of $37.44 billion. This nearly 7% drop in revenues reflects GE’s attempts to scale back the financial aspect of its business and the renewed focus on industrial goods. Apparently, the industrial side looks to have a higher profit margin and enough so to make the nearly three billion dollar slide in revenue a relatively small issue for the firm. It also hasn’t hurt that the company’s energy production equipment division has been doing pretty well as of late, helped along by high energy prices and increased demand from Japan after the earthquake [also see the free Country Lookup Tool].
In addition to a focus on the company’s outlook for the rest of the year, investors will likely look for clues on the firm’s dividend policy. GE used to be a very stable dividend payer but immediately following the financial crisis payments were drastically cut, leaving the company on the outside of many current income-focused investors. The yield has come back somewhat in months past– the company now pays out $1.20 annually– but many are looking for the firm to increase this payout in the near future. “They won’t raise their dividend this year, but they might give some guidance,” said Jeff Duncan of Duncan Financial Management. “If they can start raising the dividend more regularly, it would be a big positive for the stock.” [see all the Industrial ETFs here]
Thanks to this key earnings report from this vital industrial conglomerate, investors should look for the Vanguard Industrials ETF (VIS) to be in for a very active session on the day. The popular product, which has amassed more than half a billion in assets, currently gives its top allocation to General Electric at just over 12.2%, a level nearly three times the next biggest holding, United Technologies. In addition to these two behemoths, VIS holds about 366 other securities across various sectors of the industrial economy including the manufacture and distribution of capital goods, the provision of commercial services and supplies, or the provision of transportation services. Since GE pretty much finds itself in all of these sectors, its earnings report later today will likely move the rest of the components in the fund as well [see more holdings of VIS here].
If GE looks for a robust second half of the year or forecasts a dividend increase in the near future, VIS could soar to close out the week. If, however, investors see GE miss expectations or if the company looks for weakness ahead, this could trickle down to the rest of the sector and leave the popular Vanguard fund sharply lower for the week.
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Disclosure: No positions at time of writing, photo is courtesy of Jud McCranie.