What Q1 Earnings Say About the Economy

by Lawrence Meyers | April 30, 2012 6:30 am

If we dig into General Electric’s (NYSE:GE[1]) recent earnings report, we can learn a few things about the company and economy in general.

Revenue was up 7%, which is a nice gain. There was also an 11% jump in its industrial-business segment, which is very encouraging. Profits were up 10% in this arena. There was great news in GE’s transportation segment, too, where profits rose 48%. Health care performed nicely, with a 10% increase, and even aviation squeaked out a 2% rise. Home and business solutions profits fell 11%, but that was offset since infrastructure orders soared 14%, hitting a record high.

What do all these big jumps suggest? GE is so broadly diversified across economic sectors that I regard it as a true economic bellwether. The fact that profits were up solidly across almost every segment may suggest that the overall economy is poised to improve.

The hope is that profit increases in these manufacturing sectors will trickle down to actual human labor and that more jobs will be created. Infrastructure orders in particular may indicate that hiring could pick up.

I don’t like to look at things in a vacuum, however, so I also looked into earnings at Honeywell (NYSE:HON[2]). Its European business is soft, but rising demand in the U.S. helped propel the company to an almost 20% net income increase on a 7% rise in revenue.

Even better, Honeywell raised its 2012 forecast. The company is aiming to develop new products and new markets. And it deals in aerospace, automation and control solutions, performance materials and technologies — all the little things we never pay attention to that underlie the real economy. So again, this news seems to bode well.

Still, for now, this isn’t translating into new jobs.

We have to be careful in interpreting McDonald’s (NYSE:MCD[3]) results in this manner, but revenue and comparable-store sales growth at MCD do not indicate good news for the broader economy.

Why? If U.S. disposable income is increasing, we’d expect to see less money spent on fast food and more on higher-end restaurants. That’s not a complete picture but more like a windsock, and this windsock is blowing backward from headwinds. Comp-store sales were up 8.9% — that’s a big number. Some of that is due to new products, but certainly some of it is due to lower-income folks eating at McDonald’s more often.

What does this mean for these stocks? GE still looks like a buy to me at 12.5x earnings, given its dividend and solid cash flow. Honeywell is at 13.5x earnings, and with 10% growth and a 3.5% yield, it’s also priced fairly and worth buying. McDonald’s, on the other hand, remains overpriced to my mind, though with optimistic projections suggesting it’s fully priced going out several years.

As of this writing, Lawrence Meyers[4] did not hold a position in any of the aforementioned securities[5].

  1. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  2. HON: http://studio-5.financialcontent.com/investplace/quote?Symbol=HON
  3. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  4. Lawrence Meyers: mailto:pdlcapital66@gmail.com
  5. securities: https://investorplace.com/investing-in-securities/

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