General Electric (GE) will announce earnings on the morning of Jan. 31. These results will be extremely important for income seekers.
GE is so large and its problems have been so dramatic that it affected all stocks (including dividend stocks) but also it impacted credit markets -- causing a lot of fear and angst for the bond market -- which leaked into equity markets.
Back in November I tried to calm many of the fears surrounding GE on the credit side and it has worked very well. The company's "benchmark" bond, the 4.418% bond maturing November 2035, was trading at 77 cents on the dollar in late November and is at 87 now -- a rapid recovery, but not an "all-clear."
Other problem situations, such as Anheuser-Busch InBev (BUD) and Newell Brands (NWL) have started to resolve themselves, which is encouraging, but we need to see GE do the same to really get comfortable that the rally in income products can be sustained.
I have met with GE and spoken to a lot of analysts and portfolio managers -- both on the debt and equity sides. Here are my takeaways on expectations:
1. It is unlikely to be a "good" quarter. Look for an earnings miss. Most people are expecting some sort of miss, the risk of which can only have increased after misses by Caterpillar (CAT) and others.
2. So, don't expect a big headline number. In fact, be prepared to see stocks and bonds sell off as the headlines hit.
3. But that doesn't matter for a few reasons:
-- The new CEO is trying to sort through a lot of businesses. He has been engrossed in the troubled power business. Layers of management are being reorganized or even swept aside. That sounds like the potential for a "kitchen sink" type of quarter -- get a lot of bad news out of the way, but paint a brighter future.
-- Transparency sounds like it will be a focus. Colleagues of mine at Academy Securities have worked with the new Investor Relations team and respect them. Everything I am hearing is saying that GE will go out of its way to be transparent, which will help creditors greatly.
4. Expect GE to announce more bondholder-friendly actions. GE should be able to lay out a clearer plan for their debt issues and how they plan to handle them. They are not out of the woods, but their message was drowned out by the cacophony of fearmongers in November and now they will have a chance to explain the situation and detail plans to an audience that is prepared to listen.
5. I have seen an incredible shift in attitude from my dealings with GE people in the past four months -- all of which I think will lead to them addressing credit concerns, which will help all income seekers.
It might be early for GE stock to bounce, but if the company is as transparent as I expect and lays out a clear plan to getting back on the right track, the stock should do well too.
This is one report where the real driver will be what the company says and the tone it takes when saying it. If GE does a mea culpa and addresses longer-term credit concerns, that will more than offset any weak headlines and could spur a broad market rally -- especially in the corporate bond markets (investment-grade and even to a less extent, high-yield).
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