82170665

North America Equity Research 18 October 2010

General Electric Co.

Overweight GE, GE US

The Wall

Price: $16.25

Price Target: $21.00

Electrical Equipment and Multi-Industry

C. Stephen Tusa, Jr CFAAC

(1-212) 622-6623 [email protected]

Drew Pierson (1-212) 622-6627 [email protected]

J.P. Morgan Securities LLC

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$

Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Price Performance

YTD 1m 3m 12mAbs 7.4% -1.8% 11.1% 2.6%

General Electric Co. (GE;GE US) 2009A 2010E

(Old)2010E

(New)2011E

(Old)2011E

(New)2012E

EPS - Recurring ($) Q1 (Mar) 0.26 0.21A 0.21A Q2 (Jun) 0.26 0.30A 0.30A Q3 (Sep) 0.22 0.29A 0.29A Q4 (Dec) 0.28 FY 1.03 1.13A 1.13A 1.30 1.28 1.65Source: Company data, Reuters, J.P. Morgan estimates.

Company Data Price ($) 16.25Date Of Price 18 Oct 1052-week Range ($) 19.70 - 13.75Mkt Cap ($ mn) 172,493.75Fiscal Year End DecShares O/S (mn) 10,615Price Target ($) 21.00Price Target End Date 31 Dec 11

See page 20 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

While other companies are basking in early-cycle glory, GE has built a wall of worry, and while we appreciate the reasons for the negative stock reaction, with longer-term upside levers unchanged and a fresh dose of investor skepticism, our OW rating is unchanged.

• 3Q more “clean up” than “clean.” Results were in line with our above-consensus model, though Industrial profits missed, while a big Shinsei charge offset ongoing improvement in losses at GECS. Positives were Industrial orders and GECS core.

• Fresh “black box” worries emerge from the 3Q, not helped by financial services concern du jour . . . . Shinsei popped up again, and now the concern is the potential for a lingering liability at WMC, reinforcing the negative perception of GE as a “black box.” Management claims Shinsei is close to being put to bed, while it does not appear to us WMC is a major issue. This will take time to prove – a key brick in the wall.

• . . . Industrial moves center stage and 4Q revs a “show me” . . . While we were not expecting a big quarter from late-cycle businesses, results still underwhelmed, with a 15% q/q drop in Energy revenues the low light. 4Q guidance for flat y/y Industrial revenues points to better days ahead, but management now needs to deliver on a $4B sequential increase, a “show me.” Importantly, for ’11, outside of Wind, the GT backlog is the standard 85% sold out, positioned well with a bottom.

• . . . while GECS fundamentals still on an upward trajectory. Improving credit trends look sustainable (3Q provisions down $400mm q/q, reserves flat, coverage up). Net interest margin remains solid, and CRE continues to shrink and stabilize.

• Bottom line: 2011E will be materially better than 2010E, and 2012 should be strong, but near term revision momentum stalled. 2011E EPS revision momentum is likely stalled for now, and we are taking out $0.02 for pension, though this does not change our belief that earnings growth will accelerate next year, and even further in ’12, a positive versus earlier-cycle peers.

• Stock still cheap, pathway to better days over next 6-9 months. Shares trade at a 5-10% discount to peers’ on a SOTP basis. We see a wall of worry that includes resolution on discops issues (Shinsei/WMC) and any degree of modest turn in late-cycle businesses (starting with execution on 4Q revs), two things we think work in GE’s way over the next 6-9 months. Interestingly, core fundamentals at GECS/CRE are no longer the major issue.

This document is being provided for the exclusive use of UNIVERSIDAD ESAN at UNIVERSIDAD ESAN

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C. Stephen Tusa, Jr CFA (1-212) 622-6623 [email protected]

“The Wall” While other companies are basking in early-cycle glory, GE has built a wall of worry, and while we appreciate the reasons for the negative stock reaction, with longer-term upside levers unchanged and a fresh dose of investor skepticism, our OW rating is unchanged. Looking ahead, it’s important to maintain the long-term perspective, little of which has changed coming out of this quarter. First, while discops are annoying, the core Bear case built around GECS continuing to fade. Two, the cash story remains a positive, and FCF is on track for the year. Lastly, on Industrial, late-cycle businesses like this can lag for some time, and the catalysts of an uptick are still on the come, with execution on the 4Q industrial revenues a “show me” that should bring resolution as a catalyst around year-end. All in, the dynamic of a business close to trough with accelerating earnings growth in 2011/2012 is intact and a key positive. We start with a quick post-game wrap of the quarter.

Table 1: GE Revenues Remain Close to Trough % of total company sales

% Off Peak % Off Trough Spread

MMM 2% 14% 15% DOV -10% 19% 10% DHR -3% 10% 7% ITT -4% 3% -2% Group Avg -13% 7% -5% ROK -16% 10% -6% HON -13% 7% -7% GE -10% 1% -8% IR -16% 6% -10% HUB/B -12% 1% -11% EMR -15% 3% -12% LII -20% 8% -12% TYC -16% 1% -16% TXT -25% 9% -16% SPW -18% 1% -17%

Source: Company data, J.P. Morgan estimates.

Table 2: Group Y/Y EPS Growth (JPM est) EPS growth y/y

2011E 2012E DHR 14% 10% DOV 11% 13% EMR 19% 14% HON 12% 34% ITT 0% 8% MMM 1% 8% ROK 15% 17% SPW 22% 26% TXT 59% 83% TYC 20% 13% IR 32% 21% AVG (ex-TXT) 14% 16% GE 15% 27%

Source: J.P. Morgan estimates.

GE’s 3Q was in line with our above-consensus estimate and $0.02 ahead of the Street, though the details were mixed. Lower tax/corporate provided $0.03 of lift, mostly on lower-than-expected charges in the quarter, while we were too conservative on a tax rate that looks set to go lower in 2H10. Meanwhile, core segment profits missed our estimates by $0.03, mostly at the important Energy business. All in, mixed fundamental results along with ongoing nonfundamental distraction from discops left too many questions, and we were not surprised shares traded lower.

To start, the Industrial businesses returned to focus this quarter, but in a negative way, missing our top-line estimates in a somewhat surprising q/q decline. This was most apparent in the Energy business, which showed softness not only in Wind but also in the core Thermal unit. The guidance for flat y/y Industrial revenues in 4Q10 relieves some of the concern, making 3Q look more like a blip for what remains a lumpy business, but the implied 15% q/q revenue ramp for next quarter no longer looks conservative. The major equipment order increase of 9% was positive but not enough to offset, as most of this came from Aviation while the key Energy/O&G


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businesses declined. Further, weakness in new order pricing suggests that the favorable price spread in recent quarters is likely to normalize next year, removing a tailwind. Bottom line, despite a lack of good news out of the quarter, we were not expecting big things out of the late-cycle businesses here and continue to believe we are bouncing along the bottom at Industrial.

On GECS there was not much new out of 3Q as the business is showing sustained improvement. Credit continues to heal, net interest margin remains strong, while Real Estate is still tough but showing signs of bottoming out. The results themselves were somewhat underwhelming, however, with PTPP declining q/q owing to some one-time impairments at GECAS and some treasury marks that hit the P&L. We view these as one-off events, and there is no change to our view that GECS earnings are on a solid upward trajectory over the next 1-2 years, but after several quarters of upside surprises, there was no clear incremental positive from 3Q.

Outside of fundamentals, discops remain a distraction and reinforce concerns that GECS is a “black box.” There are a few issues that continue to weigh on sentiment, and that we continue to believe (1) are not big enough to matter over the long term and (2) represent a catalyst upon gaining more certainty in the quarters ahead. First are the Shinsei charges in discops, with the company setting aside another $1.1B in 3Q provisions ($1.7B YTD), with a view that this would be the final charge. From a big-picture perspective, we continue to believe this is not a major issue as a ~$2B cash call is small relative to GE’s financial position, and the reserve was within the range of outcomes provided on the 2Q call, which included $1.2B of incremental exposure at the high end. Indeed, the current reserve can handle a 5% m/m decline in claims continuing through 2015, or the September run rate of claims for 24 months, so reasonably conservative. What was surprising, however, was the contrast in tone between 2Q, when management was upbeat about declining claims trends, and 3Q, when September claims jumped 17% m/m and management went directly to a reserve level that was previously portrayed as “downside case.” Whether material or not in the long run (we think not), we believe investors were unnerved by the sudden shift in tone.

The Shinsei issues were magnified, however, by emerging concerns around mortgage put-back risk at WMC, GE’s US Alt-A/subprime mortgage business exited in 2007. As background, GE acquired WMC in mid-2004 and originated through 2006 in an “originate to sell” model; volumes were ~$33B in 2006 and ~$32B in 2005, and GE stopped new issuances in 1Q07. GE put up $500mm of reserves for any residual exposure at the time of its exit and still has ~$100mm of standing reserves from the sale of the business in 2007. This compares to pending claims of ~$250mm (of which it has been winning >80% YTD). Management indicated it expects no related charge in 4Q10 for more claims.

To help put this in context, we run some numbers using a set of assumptions from our US banks credit analyst Kabir Caprihan (see recent note here) around loans issued between 2H05 and 2008, which he deems to be at most risk. In a base case of risk exposure for the industry, he assumes that (1) 100% of the issued loans Alt-A, option ARM, and subprime mortgages are still outstanding; (2) 50% are delinquent; (3) 15% of the delinquent loans are put back; (4) 50% of the put-back mortgages are accepted by the courts; and (5) the issuer takes a 50% loss on accepted mortgages. In a more severe scenario, 40% of loans are assumed to be put back, of which 30% are accepted. Applying these numbers to GE’s WMC (assuming $50B of originations


https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-487371-0.pdf

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between 2H05 and 2006) implies somewhere between $1.0B-1.5B in potential exposure, even under relatively conservative assumptions. Similar to Shinsei, this is at most a cash call and not a major issue long term, in our view, though it is yet another nonfundamental issue management will have to address.

Table 3: GE Mortgage Put-Back Scenarios for WMC $mm

Base Case Severe Case $ amount Assumption $ amount Assumption

Issued 50,000 Issued 50,000 Delinquent 25,000 50% Delinquent 25,000 50% Delinquent & Put Back 3,750 15% Delinquent & Put Back 10,000 40% Put-backs accepted 1,875 50% Put-backs accepted 3,000 30% Loss severity on put backs 938 50% Loss severity on put backs 1,500 50% Source: J.P. Morgan estimates.

Tweaking down 2011 estimate – cheap stock with a wall of worry Our 2010 number is unchanged, though we are clipping ~$0.02 out of our 2011 estimate, which includes $0.03 from the industrial businesses and an additional $0.02 for pension, partially offset by tax and a lower share count (recent repo). Pension is not news, nor is it unique to GE, but this is a headwind next year. The details here include a $1B increase from amortization of prior losses, while 25bps of discount rate headwind is $200mm, and the company would face another $300mm in headwind if GE lowered its long-term return assumption 50bps – we model a $1.6B y/y headwind, or $0.11 of EPS on an after-tax basis, which accounts for this risk. While our revisions are not large on an absolute basis, we think upward 2011 EPS revision momentum is likely stalled until GE can show better visibility on a turn in the Industrial businesses.


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Table 4: GE EPS Bridge, JPM(E) $mm except per-share data

09 Actual 10 JPM(E) 11 JPM(E) Beginning EPS 1.79 1.03 1.13 Pension (0.08) (0.07) (0.11) Corporate, x-pension/rstrng/gains 0.03 0.03 (0.00) Restructuring spend (0.02) 0.08 0.00 Restructuring saves 0.04 0.03 0.03 Industrial Gains/Impairments 0.05 (0.02) (0.03) Aviation R&D 0.00 (0.01) (0.03) Olympics 0.00 (0.02) 0.02 Forex 0.00 0.00 0.01 Interest 0.05 (0.01) 0.02 Tax Rate 0.07 (0.05) (0.01) Share Count (0.05) (0.01) 0.00 Base EPS 1.86 0.99 1.02 Industrial Price/Cost 0.14 0.07 (0.02) Industrial Volume/Mix (0.34) (0.07) 0.07 GE Capital (0.63) 0.14 0.22 Provisions (0.34) 0.27 0.21 Tax 0.14 (0.28) (0.14) NIM & Other (0.44) 0.14 0.14 Final EPS 1.03 1.13 1.28

Prior Year Industrial Sales 111,733 103,044 99,765 + Currency (1,100) (635) 830 + Organic (7,589) (2,644) 3,760 = This Year Industrial Sales 103,044 99,765 104,355 Organic Growth -7% -3% 4%

Implied $ Profit Incr/(Decr) (4,576) (1,061) 961 Implied Incr/Decr Margin 60% 40% 26%

Source: Company reports, J.P. Morgan estimates.

On a valuation basis, GE shares are not expensive, which should provide support near term. Our bottom-up sum-of-the-parts based on public comparables suggests shares are 5-10% undervalued at current levels. Looked at another way, assuming just 1x tangible book value for GECS (low end of bank peer ranges), GE Industrial trades at 14x 2011E EPS versus ~15x for the EE/MI group. Over time, shares look attractive as we think the GECS multiple can expand with better earnings and GE’s Industrial assets deserve a premium multiple to the group; however, closing the standing discount will require execution and better earnings visibility, both of which took a step back this quarter, in our view.

Table 5: With GECS at 1x TBV, GE Industrial Trades at 14x 2011E EPS FY11E EPS Multiple Per Share

Industrial EPS 0.90 14.0 12.55 TBV/share Multiple Per Share

GECS Implied 3.70 1.0 3.70 Current Stock Price 16.30

Source: Bloomberg, J.P. Morgan estimates.


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Table 6: SOTP Implies GE 5-10% Undervalued $mm except per-share and multiple data

2011E Suggested Suggested 2011E Suggested Suggested EBITDA Multiple Value EPS Multiple Value

GE Industrial 14,192 8.4 118,778 $0.78 14.1 $11.04 Infrastructure ex-HC/O&G 9,550 8.2 78,264 $0.56 14.2 $8.00 Oil & Gas 1,285 9.8 12,585 $0.07 15.8 $1.13 Healthcare 2,761 8.3 22,852 $0.15 13.1 $1.94 Home & Business Solutions 596 8.5 5,077 ($0.00) 13.6 ($0.03) NBCU 2,411 7.2 17,303 $0.12 12.8 $1.50 Consolidated Ind Value 17,549 7.8 $136,081 $12.54 GECS Tangible Book 37,331 1.4 51,817 37,331 1.4 $4.87 Total Value 187,898 Net debt (2,955) Equity value $190,853 Shares 10,650 Suggested value per share $17.92 $17.41

Average of two analyses $17.66 Current stock price $16.25 Difference 8%

Source: Bloomberg, J.P. Morgan estimates. Suggested multiple is based on average of public peers in related industries.


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Key Points on Industrial Energy a top line miss The disappointing point in the quarter was the Energy business, where revenues fell 15% on a q/q and y/y basis. This was driven mostly by wind, down 30% y/y, partly on a tough comp last year – unit shipments were actually up to 616 versus 511 last quarter, though there is some seasonality at play here. Other areas, such as Jenbacher (-29% y/y) and Aeroderivatives (-25% y/y), contributed to the weakness. There were also lower shipments of 3rd-party products in service contracts, which hurt the top line by ~$300mm y/y but with less profit impact, while steam turbine and generator shipments were also down 50%+ y/y. On a sequential basis, we note that GE shipped 8 steam turbines last quarter versus zero in 3Q, which we think could represent a ~$300mm swing in 3Q versus 2Q. We recognize that revenues can be lumpy quarter to quarter due to project activity, but the 15% q/q drop in revenues was the biggest we’ve seen since at least 2005 (excluding 1Q, a seasonally light quarter for Energy) and represents a new cycle low.

Table 7: Energy Down 15% y/y in 3Q $mm

3Q09 Energy Revenues 7,979 Wind (600) 3rd party pass thru products (300) Other (267) 3Q10 Energy Revenues 6,812


Importantly, looking ahead, we continue to believe we are close to bottom. Indeed, the important GT business remains 85% sold out for a flat year next year, needing orders for about 18 units for 2011 delivery over the next few quarters (versus average run rate of ~20-25 orders per quarter). Wind is an issue, though our model is appropriately conservative here, down 15% next year – this includes a ~30% drop-off q/q in 4Q and no improvement from that run rate into next year.

Flat 4Q growth suggests a solid pickup from 3Q run rate, but admittedly a “show me” For 4Q, management guided to flat y/y Industrial revenues, or a ~$4B sequential increase. On the positive side, this suggests better visibility in the coming quarter, with some improvement coming from Aviation aftermarket as well as Oil & Gas (Gorgon shipments accelerating). Indeed, Industrial revenues can show quarterly swings, and GE has had some big 4Q lifts in the past. On the negative side, however, the 3Q run rate makes near-term numbers look less conservative, as we are now counting on a solid 4Q.


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Figure 1: GE Industrial Revenues $mm

15,000

20,000

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35,000

1Q07

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4Q07

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2Q08

3Q08

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Guid

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Source: Company reports.

Orders grow, led by aviation, while O&G orders slip As for orders, the 9% growth in major equipment orders was ahead of our expectations and a positive at face value. Looking closer at the orders, however, we note that much of this came from 33% growth at Aviation. Outside of Aviation, major equipment order growth was flattish, led by continued strength at HC (+5%) and declines at Energy (-5%). On the services side, however, the picture was brighter as total orders were up 4% including 8% growth at Energy. Looking ahead, next quarter’s equipment orders are likely solid as O&G saw ~$370mm in orders pushed to 4Q, while Energy should begin booking some of the recent order wins in Saudi Arabia and Korea – but the 4Q09 order comp gets more difficult by >$2B, which means GE needs ~$1.3B more orders than it booked in 3Q just to be flat y/y. All in, a mixed picture.


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Figure 2: Major Equipment Orders Y/Y % Change

11% 4% 5%

-11% -21%-42% -32%

-14%-10%

17% 9%

-80%-60%-40%-20%

0%20%40%60%80%

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

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-80%-60%-40%-20%0%20%40%60%80%

Total Major Equipment Orders


Figure 3: Services Orders Turn Positive Y/Y % Change

5%

19% 16%

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14%

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Serv ice Orders


Figure 4: Aviation Drives Most of the Equipment Order Growth in 3Q

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2,400

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6,600

8,000

Av iation Non-Av iation

3Q09 3Q10

+32%

+4%


Pricing on Energy orders continues to slide despite positive value gap Another detail of the results worth watching is the pricing on new orders, particularly at Energy, which will be an indication of future margins. GE continues to benefit from a positive “value gap” (price/cost), which has been a result of good pricing in the backlog along with ongoing material cost savings from the supply chain. This was $190mm in Energy Infrastructure this quarter, though this was down from $300mm in recent quarters. Further, pricing on new orders has weakened in recent quarters, particularly in Wind but also in Thermal. This is something to watch.


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Figure 5: Pricing Value Gap Still a Profit Driver, But Narrowing . . . Operating Profit $, in millions

9371,346 1,109

1,639934 1,086 873

1,317 1,0391,361 1,471

216456

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300300 190

0

500

1,000

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2,000

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Energy Base Energy Value Gap

Source: Company reports and J.P. Morgan estimates.

Figure 6: . . . and Pricing on New Energy Orders Moving Negative % change in price y/y (new orders)

1%

-1% -1%-5%

-2%

6%

-8%-12%-15%

-10%

-5%

0%

5%

10%

4Q09 1Q10 2Q10 3Q10

Thermal Wind

Source: Company data.

Historically, pricing changes tend to follow orders, with a significant lag Indeed, as shown in the chart below from the last cycle, Energy pricing tends to lag the change in orders, as the company works through its existing backlog. In 2003, even as orders bottomed and moved up 9%, price was down 2% and stayed down through 2005, a drag, even as volumes turned up. In total, the cumulative drag from price, peak to trough, was $1.7 B, or 27% of peak Power Systems profits. While we acknowledge there are few orders being booked currently, making the pricing trend harder to discern, the “value gap” for 2011 is an important variable moving into the December outlook call.


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Figure 7: Price Change Lags Orders (y/y change) Price y/y Orders y/y

-6%-5%-4%-3%-2%-1%0%1%2%3%

2002 2003 2004 2005 2006-65%

-45%

-25%

-5%

15%

35%Orders Price


Aviation services mixed in 3Q but showing signs of picking up In the important Aviation services business, performance was underwhelming again, down 3%, hurt by low profitability in the initial GENx engine shipments. Core daily spares order rates, however, continue to show improvement, accelerating to $22.2mm/day in 3Q. This should bode well for 2011 as the business exits the year.

Figure 8: Daily Spares Order Rate Continues to Improve $mm/day

1617181920212223

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10


Looking into next year, management did not update its guidance for 2011 aviation R&D, which stands at a $300-500mm y/y increase, though comments suggested that some of this ramp was occurring in 2H10. We expect more update on the December outlook call. For now, our model incorporates a $400mm headwind and a ~30% core incremental margin, which seem reasonable in a year when growing aftermarket/service sales should be a tailwind for margins.

Table 8: 2011E Aviation Bridge $, in mm

Sales Growth Profits Mgn Start 17,750 3,284 Core 1,100 6% 364 33% Reversal of 2010 Gain (100) R&D Increase (400) End 18,850 3,148



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Key Points on GECS Credit continues to heal In credit, 3Q showed continued solid trends with both provisions and charge-offs ~$200mm below our estimates. Overall reserves were flat at $9.1B, which included a ~$100mm increase at Commercial businesses and a ~$100mm decrease at Consumer, where the book is shrinking. Overall Coverage increased to 2.69% from 2.66% in 2Q, showing that coverage can increase even as provisions come down significantly. As for Real Estate, trends are stable with earnings up q/q and pretax impairments in the Equity book of $486mm (2Q $528mm, 1Q $585mm) continuing their downward trends.

Figure 9: Provisions and Charge-Offs Continue to Come Down $B

0.51.01.52.02.53.03.5

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Prov isions Write-Offs


Net interest margin holds in, PTPP slides sequentially, mostly a function of impairments Elsewhere, the pretax preprovision income of $2.2B was down from $2.7B, a negative at face value. Looking closer, however, this q/q decline was primarily driven by the annual impairment test at GECAS (~$250mm) and the deconsolidation of Regency at EFS (~$200mm) as well as some Treasury marks which reflect the company’s hedging positions (another $200mm hit sequentially, as this was a $100mm benefit in 2Q and a $100mm negative in 3Q). Thus, the overall picture was little changed from 1Q on an underlying basis.

Table 9: Sequential GECS PTPP Walk $bn

PTPP 2Q 2,717 GECAS impairments ~(250) Treasury marks ~(200) Fewer RE impairments ~(50) Regency ~(200) Asset reduction/other ~(50) PTPP 3Q 2,164


Table 10: Sequential GECS Revenue Walk $bn

2Q GECS revenues 13,148 Regency deconsolidation ~(200) Treasury marks ~(200) Asset reduction/other ~(300) 3Q GECS revenues 12,469


Indeed, GE Capital’s portfolio margin is now running at 5.2% YTD, little changed from 1Q (though the above items add some noise), and the company is ahead of its ~5% target for the year. Meanwhile, new business volumes continue to be booked at


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a solid 2.9% ROI in 3Q (2.6% in 2Q). This means that the positive net interest margin story remains intact, an ongoing driver into 2011-2012 given that the commercial book turns over every 4-5 years, on average.

Figure 10: GE Capital Portfolio Margin Remains Solid

5.7%

5.4%

4.8%

5.2%

4.6%

4.0%

4.5%

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2006 2007 2008 2009 2010 YTD



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3Q Details 3Q EPS of $0.29 were in line with our model. Overall op profits missed our above-consensus model by $0.03, all at Industrial, with Capital Finance in line. Corporate helped by $0.02 and tax by $0.01. At Industrial, the miss was primarily at Energy Infrastructure, where the top line missed by 17% but margins beat by 120bps. Tech Infrastructure was also light (-$0.01), driven by Aviation and Healthcare. NBCU missed by $0.01. Total sales of $35.9B were ~$2.7B lower than our estimates of $38.6B. Overall Industrial sales missed by 8%, with margins missing by 70bps at 16.2%. Cash generation was in line with 2Q at $3.8B, on track for $14-15B for the year. On Capital, provisions of $1.7B were below our $1.9B, while pretax earnings were $468mm (JPMe $723mm) and PTPP was $2.16B (2Q $2.72B). GECS equity came in at $66.9B (2Q $67.3B).

Table 11: 3Q10 Details vs. JPM Estimates $, in millions

Actual JPM(E) A vs. E 3Q10A 3Q10E ($) % Per Share

Energy Infrastructure 8,359 9,800 (1,441) -17% Technology Infrastructure 9,210 9,440 (230) -2% Home & Business Solutions 2,125 2,225 (100) -5% NBC Universal 4,069 4,400 (331) -8% Capital Finance 11,616 12,087 (471) -4% Corporate Items & Eliminations 509 700 (191) -38% Total Sales 35,888 38,652 (2,764) -8% Energy Infrastructure 1,656 1,827 (171) -10% (0.01) Technology Infrastructure 1,474 1,663 (189) -13% (0.01) Home & Business Solutions 104 160 (56) -54% (0.00) NBC Universal 625 726 (101) -16% (0.01) Capital Finance 871 830 41 5% 0.00 Total Segment Profit 4,730 5,207 (477) -10% (0.03) Corporate and Eliminations (472) (780) 308 -65% 0.02 Interest and other financial charges (393) (430) 37 -9% 0.00 Provision for Taxes (705) (827) 122 -17% 0.01 Share Count 10,674 10,725 (51) 0% 0.00 EPS - Continuing Ops $0.29 $0.29 0.00 Industrial Tax Rate (%) 22.2% 27.5% Margins bps Energy Infrastructure 19.8 18.6 1.2 Technology Infrastructure 16.0 17.6 (1.6) Home & Business Solutions 4.9 7.2 (2.3) NBC Universal 15.4 16.5 (1.1) Capital Finance 7.5 6.9 0.6 Total 13.2 13.5 (0.3) Source: Company reports and J.P. Morgan estimates.

Energy Infrastructure weaker than expected Energy Infrastructure profits were a modest miss ($0.01) versus our model, flat y/y, driven mainly by weaker-than-expected sales partially offset by stronger margins. Sales of $8.4B (dn 14% y/y) were $1.4B below our model, mainly due to weakness in the Energy subsegment. Margins expanded 290bps to a strong 19.8% (JPMe 18.6%). By subsegment, Energy revenues (-15% y/y) were significantly below our model. Energy operating profits were up 3% y/y. Margins were stronger than expected at 20.4% (JPMe 18.7%), expanding 370bps y/y. Energy orders rose by 2% to $7.5B, and services orders were up 8%. For Oil & Gas, revenues of $1.8B (-9% y/y) were 3% lower than our estimates. O&G orders were $1.7B, down 22% with equipment down 44% while services up 15%. O&G profits were down 15% y/y.


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Table 12: Energy Infrastructure Segment Performance Y/Y % Change

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Energy Total Sales Growth 71% -21% 5% -4% -13% -13% -7% -8% -15% Profit Growth 53% -14% 16% 12% 7% 6% 12% 3% 4% Margin % 13.7% 16.7% 15.4% 18.6% 16.8% 20.5% 18.6% 20.7% 20.4%

Oil & Gas Total Sales Growth 11% -4% 1% 3% 3% 10% 3% -9% -9% Profit Growth 29% 22% 11% 11% 11% 4% 7% 3% -15% Margin % 16.1% 19.4% 11.6% 14.5% 17.3% 18.4% 12% 16.5% 16.1% Source: Company reports.

Table 13: Energy Infrastructure Segment Orders Y/Y % Change

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Energy Total Order Growth 18% 0% 33% -26% -25% -6% -15% +8% 2% Major Equip Orders 21% 0% -36% -62% -50% -22% -24% +19% -5% Services Order Growth 14% 0% 4% 12% 9% 15% -5% 0% 8% Thermal Order Growth ~0% 1% -53% -55% -46% -19% -56% 45% n/a Gas Turbine Unit Orders 33 70 18 25 23 40 10 42 15 Wind Order Growth 50% 5% -8% -60% -43% -25% -28% 7% -15% Wind Turbine Unit Order >1,000 988 724 216 935 585 494 248 500

Oil & Gas Major Equipment Orders -12% -19% 2% -7% 6% 30% 1% 11% -44% Services Order Growth 36% 2% -5% -15% -5% 30% 19% -3% 15% Source: Company reports.

Tech Infrastructure misses on Aviation and Healthcare Tech Infrastructure missed both on revs as well as margins. Revs of $9.2B (dn 1%y/y) were weaker versus our estimate of $9.4B, and margins of 16% (170bps lower y/y) were 160bps below our model. Aviation revenues were down 3% y/y on lower military unit shipments. Operating profit was down 17%. Overall Aviation orders were up 10% y/y, with equipment orders growing strongly by 32% y/y. Service orders were down by 6% during the quarter. Commercial spares orders were up to 25% after adjusting for last year’s Aviall order. Healthcare revenues were up 4% y/y (equipment revs +5%, service +3%) and profits up 14%y/y. Overall orders were up by 6% y/y with equipment orders up by 8% y/y, guided by strong growth in clinical systems. Transportation revenues were down 10%y/y ($869mm vs. JPMe $850mm) primarily on weak locomotive sales, with shipments declining to 96units from 117 a year ago. Segment profit of $101mm was down 43%y/y, driven by lower volume. Equipment orders saw strong growth of 400%, while service orders were up 15%y/y.


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Table 14: Technology Infrastructure Segment Performance Y/Y % Change

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Aviation Equipment Sales Growth 6% 12% -3% -10% -21% -21% -4% -4% Services Sales Growth -2% 11% 0% -2% +8% -5% -11% -3% Total Sales Growth 2% 12% -6% -6% -8% -14% -8% -3% Profit Growth 21% 39% 1% 16% -18% -26% -5% -17% Margin % 22.5% 22.4% 20.0% 21.4% 20% 19.2% 20.6% 18.3%

Healthcare Sales Growth -3% -9% -12% -9% -2% 5% 3% 4% Profit Growth -9% -22% -21% -20% -3% 21% 12% 14% Margin % 19.5% 11.6% 14.9% 13.4% 19.4% 13.3% 16.1% 14.7%

Transportation Equipment Sales Growth -48% -1% -17% -32% n/a -50% -30% n/a Services Sales Growth -10% 5% -6% -14% n/a -20% -37% n/a Total Sales Growth 20% 2% -11% -23% -56% -35% -34% -10% Profit Growth -16% -15% -2% -31% -174% -47% -89% -43% Margin % 15.0% 18.5% 22.1% 18.2% -25.4% 15.0% 3.7% 11.6% Source: Company reports.

Table 15: Technology Infrastructure Segment Orders Y/Y % Change

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Aviation Major Equipment Order Growth -26% -4% -44% -37% -48% -21% -8% 32% Services Order Growth 9% 18% 5% 1% 19% -3% -5% -6%

Transportation Major Equipment Order Growth -48% -60% -71% -23% 141% 51.7% 400% 400% Services Order Growth -10% 19% -38% -43% -40% -37% -1% 16%

Healthcare Major Equipment Order Growth -6% -11% -15% -13% 13% -2% 9% 8% Services Order Growth 1% -2% -3% -1% 7% 3% 2% 1% Source: Company reports.

NBCU misses by penny NBC revs of $4.1B (JPMe $4.4B) remained flat y/y. Margins of 15.4% (JPMe 16.5%) contracted by 260bps y/y. Profits of $625mm were down 15% y/y (up 5% excl one-time charges of $137mm in 2009). Consistent with previous quarters, Cable remained strong (revenues +8%, profits +22%). Broadcast revenues of $1.4B were down 2% and operating profits were down 80mm y/y, driven by significant investment in prime time. Films and Parks had a strong quarter, with revenues up 16% and op profits up ~200%.

Table 16: NBCU Segment performance Y/Y % Change

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Sales Growth 8% -3% -2% -8% -20% -4% 23% 5% 0% Profit Growth 10% -6% -45% -41% 13% -30% -49% 13% -15% Margin % 12.7% 19.5% 11.1% 15.1% 17.9% 14.1 4.6 16.2 15.4 Source: Company reports and J.P. Morgan estimates.

Home and Business Solutions in line This segment was in line with our estimates, with revs of $2.13B down 1%y/y (JPMe $2.23B). Margins of 4.9% were flat y/y, slightly below our estimates. Segment profits were flat y/y. Lighting was strong (orders +9%), and profits were helped by


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restructuring benefits. Appliance revs were down 4%y/y and orders were down 6%, driven by continued weakness in contract channel.

Table 17: Home and Business Solutions Segment performance Y/Y % Change

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Sales Growth -22% -20% -17% -7% 1% 4% -1% Profit Growth -69% -38% 189% 212% 58% 59% 0% Margin % 2.3 % 4.1% 4.9 % 5.9 % 3.7 % 6.4% 4.9% Source: Company reports and J.P. Morgan estimates.

Capital Finance weaker than expected Overall, Capital Finance earned $855mm in the quarter versus our expectation of $923mm. This is partially a function of lower core GECS revenues, which came in at $12.5B versus our expectation of ~$12.9B. This was partially offset by lower provisions (~$200mm) and a higher-than-expected tax benefit of $387mm (JPMe $200mm). Write-offs were lower than expected at $1.8B (JPMe $2.0B).

Table 18: 3Q10 GECS Key Metrics vs. JPM Estimates $mm

3Q10A JPM(E) Difference GECS revenues 12,469 12,925 -456 Interest expense 3,790 3,753 37 Provisions for losses on financing receivables 1,696 1,903 -207 Write-offs 1,809 20,50 -240 GECS Pretax income 468 723 -255 Tax benefit (expense) 387 200 187 GECS net income 855 923 -68


By segment, CLL led the strength in 3Q on the back of lower losses and impairments. EFS came marginally ahead of our estimates, while GECAS was down by $103mm due to the annual impairment review in the quarter. The Consumer business saw profits of $826mm, driven by lower credit losses partially offset by some lower assets. US retail finance earned $329mm. Although Real Estate remains weak, it came in ahead of our estimates and better than 2Q’s loss of $524mm.

Table 19: Capital Finance 3Q10 Subsegment Performance vs. JPM Estimates Profits, $mm

3Q10A JPM(E) Difference Commercial Lending & Leasing (CLL) 443 327 116 Energy Financial Services 55 53 2 GECAS 158 261 (103) Consumer 826 821 5 Real Estate (405) (475) 70 GE Capital 871 830 41


Credit metrics saw improvement nearly across the board in 3Q, with the one exception of Real Estate. Mortgage delinquencies were down 52 bps. Metrics in the key commercial/consumer exposures improved meaningfully from 2Q, and total Commercial nonearners are down ~$150mm on a dollar basis.


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Table 20: GECS Portfolio Quality 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Equipment Leasing Delinquency 2.17% 2.84% 2.78% 3.01% 2.81% 2.71% 2.50% 2.26% Non-earners 1.68% 2.27% 2.45% 2.86% 2.98% 2.86% 3.07% 2.90%

Consumer, Total 30+ Delinquency 7.43% 8.25% 8.77% 8.80% 8.82% 8.72% 8.66% 8.34% Non-earners 3.33% 4.24% 4.75% 4.78% 4.92% 4.75% 4.79% 4.67%

Consumer, Mortgage 30+ Delinquency 10.56% 11.80% 13.23% 13.38% 13.26% 13.49% 14.20% 13.68% Non-earners 5.47% 6.81% 7.79% 7.78% 7.74% 8.23% 8.72% 8.63% Consumer, Non-Mtg 30+ Delinquency 5.62% 6.18% 5.94% 5.95% 6.18% 5.94% 5.52% 5.26% Non-earners 1.75% 2.20% 2.24% 2.33% 2.69% 2.72% 2.56% 2.39% Real Estate 30+ Delinquency 1.15% 2.24% 4.03% 4.19% 4.33% 4.97% 5.40% 5.74% Non-earners 0.41% 1.22% 2.88% 2.90% 2.79% 3.67 3.68 3.35


Table 21: GE Capital Nonearnings and Write-Offs Y/Y % Change

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 GE Money Non-Earnings 4,763 4,750 5,428 6,593 6,519 6,504 6,803 6,350 6,291 % Receivables 2.78% 3.33% 4.24% 4.71% 4.78% 4.94% 4.75% 4.79% 4.67% Write-Offs 1,033 1,239 1274 1,477 1,418 1,267 1719 1,542 1,327 %ANI 2.04% 2.67% 2.23 4.37% 4.10% 3.81% 5.00% 4.47% 3.97% Total GE Cap Non-Earnings 7,335 7,997 10,049 13,104 13,808 13,255 13,637 12,652 12,278 % Receivables 1.72% 2.12% 2.79% 3.58% 3.88% 3.84% 3.73% 3.70% 3.61% Write-Offs 1,305 1,985 1,567 1,915 1,919 1,929 2,405 2,168 1,809 %ANI 0.87% 1.36% 1.70% 2.11% 2.13% 2.20% 2.71% 2.45% 2.12% Provisions 1,640 3,065 2,336 2,817 2,868 2,907 2,263 2,009 1,696 Prov/Write-offs 126% 154% 149% 147% 149% 151% 94% 92% 94% Source: Company reports and J.P. Morgan estimates.

Valuation & Rating Analysis We remain Overweight. GE shares trade at ~10x our 2012E EPS of $1.65, a ~20% discount to EE/MI peers. While GE has traditionally traded at a premium to the group, we think a 10% discount is more appropriate going forward, with a discount from Capital (1.3x tangible book) offsetting a premium from best-in-class Industrial assets (15.5x, or ~10% premium to the group target of 14x). Our December 2011 price target of $21 is based on a 10% discount to the group target multiple of 14x 2012E EPS, also reconciled on the SOTP basis below.


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Table 22: GE PT Detail $ per share

FY12E EPS Multiple Per Share Industrial EPS 1.04 15.5 16.19

Tang BV/Sh Multiple Per Share GECS Implied 3.70 1.3 4.81

GECS implied P/E 8.0 Price Target 21.00


Risks to Our Rating and Price Target Downside risks at GECS include: (1) a step-back in global unemployment and other credit drivers; (2) tail risk around unforeseen regulatory action; (3) higher-than-expected losses or impairments from real estate; and (4) further pressure on the global financial system that hurts asset values or limits GECS’s access to the wholesale funding markets. Downside risks at Industrial include: (1) prolonged weakness in global power markets that slows an earnings recovery; (2) weaker-than-expected commercial air traffic that hurts Aviation services; (3) another leg down in hospital capital equipment spending; and (4) continued weakness in film and advertising markets.


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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for General Electric Co. within the past 12 months.

• Client of the Firm: General Electric Co. is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services.

• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services from General Electric Co..

• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from General Electric Co..

• Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other than investment banking from General Electric Co.. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from General Electric Co..

• J.P. Morgan and/or its affiliates are acting as financial advisor to General Electric Corp. (NYSE: GE) in connection with the signed definitive agreement to form a joint venture that will be 51 percent owned by Comcast (NASDAQ: CMCSA, CMCSK), 49 percent owned by GE and managed by Comcast. The announcement was made on December 3, 2009. The transaction has been approved by the Board of Directors of GE and Comcast. It is subject to receipt of various regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and approvals of the Federal Communications Commission and certain international agencies. The transaction is also subject to other customary closing conditions. NBCU has obtained $9.85 billion of committed financing through a consortium of banks led by J.P. Morgan, Goldman Sachs, Morgan Stanley, BofA Merrill Lynch and Citi.

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General Electric Co. (GE) Price Chart

N $8 OW $20

N $9 OW $17

N N $13 N $12 OW $17 OW $22OW $23 OW $21

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

Price Target ($)

16-Jun-08 N 28.97 -- 09-Dec-08 N 18.88 13.00 06-Feb-09 N 10.85 9.00 10-Mar-09 N 8.87 8.00 12-May-09 N 13.68 12.00 08-Sep-09 OW 13.87 17.00 19-Oct-09 OW 16.08 17.00 16-Dec-09 OW 15.69 20.00 07-Jan-10 OW 15.45 22.00 19-Apr-10 OW 18.94 23.00 17-Aug-10 OW 15.46 21.00

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE


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All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: C. Stephen Tusa, Jr CFA: 3M (MMM), Danaher (DHR), Dover (DOV), Emerson Electric Co. (EMR), Generac (GNRC), General Electric Co. (GE), Honeywell (HON), Hubbell Inc. (HUBB), ITT Corp. (ITT), Ingersoll Rand (IR), Lennox International (LII), Rockwell Automation (ROK), Roper Industries (ROP), SPX Corp. (SPW), Sensata (ST), Textron (TXT), Tyco International (TYC), WABCO (WBC), Watsco (WSO), Watts Water Technologies (WTS), Wesco (WCC)

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage

46% 43% 12%

IB clients* 49% 45% 33% JPMS Equity Research Coverage 43% 48% 8% IB clients* 69% 60% 50%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

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