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General Electric Is a Bad Short-Term Trade, Good Long-Term Buy

General Electric (NYSE:GE) reported an 18% drop in fourth-quarter earnings Friday. Deciphering the reasons why, however, requires you to plod through the company’s complicated operations and the even more confusing nature of its corporate communications.

So what’s the score with GE? Is it a company on the rebound, or is this recent earnings report a sign that you should take profits before General Electric loses power?

My two cents: General Electric has been awfully overhyped in recent weeks, in part because of the promise of good earnings that didn’t really seem to materialize. And even after today’s disappointment, GE stock is up almost 20% since Dec. 1! That is too much too fast for a behemoth like this.

However, with a dividend yield once again above 3.5% and signs of life in GE Capital once more, General Electric could be a good long-term investment. Folks willing to sit on shares for years instead of months might be well served to buy in this pause after GE earnings.

First, let’s dissect the fourth-quarter General Electric earnings report. Doug McIntyre at 24/7 Wall Street does a great job cutting through the nonsense. His unit-by-unit breakdown of the earnings shortfall shows the following:

  • Aviation revenue up 2%, operating income up 4%.
  • Health care revenue up 1%, operating income down 4%
  • Energy and infrastructure revenue up 19%, but operating income flat

In a world where Boeing (NYSE:BA) kept rewriting its order records with a flurry of big deals in 2011 and where Lockheed Martin (NYSE:LMT) can sell dozens of F-16s to Oman and Iraq for over $1.4 billion, you’d think GE could squeak out more than that tiny gain in aviation.

And considering aging baby boomers continue to create massive demand for high-tech imaging procedures like MRIs, you would think that General Electric’s medical devices also would be in high demand. The U.S. is the largest medical devices market in the world, with estimated sales of roughly $95 billion in 2010 and growing. A paltry 1% sales increase isn’t very encouraging, even if its top competitor, Germany’s Siemens AG (NYSE:SI), is facing headwinds of its own.

Energy and infrastructure would seem like a bright spot if you look at sales, but a jump of that magnitude in revenue without any increase in actual profits doesn’t mean much.

Other issues: The sale of its majority stake in NBC Universal last year gave a short-term juice to numbers that didn’t appear in the 2011 report. Also, global macroeconomic issues such as currency exchange rates and trouble in Europe weighed on earnings. Lastly, GE’s industrial margin continued to shrink, to 16.2% in the fourth quarter from 17.6% a year earlier. That 2010 number likely is history, too, since GE said it was aiming to reclaim only 0.5 percentage points of those lost margins in 2012.

Of course, earnings are in many ways a look in the rearview mirror. Now let’s get to the future prospects of GE, and its growth potential.

In its earnings report, General Electric touted that “Record Infrastructure orders of $28.6 billion in the fourth quarter enabled GE to end the year with a backlog of $200 billion, the largest in its history.” Sounds pretty impressive, especially considering that the energy and infrastructure division already posted those impressive 19% gains in Q4.

It’s also worth noting that GE Capital provided 46% of last year’s post-tax earnings, according to General Electric CEO Jeff Immelt. The exec said the finance arm was “safe and secure and rebounding sharply” after a rather brutal impact on the company across the mortgage meltdown of 2008. Profit in the GE Capital segment jumped 58% from a year earlier to $1.62 billion — not within spitting distance of the $2.21 billion generated from the energy and infrastructure, but certainly evidence that General Electric is banking big on its financial business again.

Then, of course, there’s the chatter on Wall Street. It seems that after a lot of ugly criticism during the past few years — which was richly deserved as GE slashed its dividend by two thirds and still remains 50% off its pre-recession peak — the “smart money” is coming around to General Electric again. According to MarketWatch, 28 different analysts now have “buy” recommendations on General Electric — the most since 2008.

However, most encouraging of all for long-term investors was a recent report that internal reorganization of the business will shrink GE more than previously planned. Hopefully this move will allow Immelt and General Electric to focus on the potential of GE Capital, squeeze more profits out of energy and infrastructure and refocus health care to capitalize on demographic trends.

Those obviously are long-term missions, of course, which is why I think GE stock is fit only for long-term investors. The 3.5% dividend is a good hedge, too, for buy-and-hold portfolios.

But with so many competing factors and so much hype in the short term, traders might want to sit out GE for a while. It doesn’t seem like there is that much more upside in the immediate future after a red-hot run in December.

Jeff Reeves is the editor of Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.

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