GE: Banking on a brighter economy

NEW YORK (CNNMoney.com) -- Investors are keen to hear what General Electric Co. has to say about its troubled finance division, GE Capital, when it reports results Friday morning.

Despite many calls to sell off the finance and lending arm, GE (GE, Fortune 500) has said it is sticking by GE Capital and predicted that the unit could carve out a profit of between $2 billion to $2.5 billion this year.

Before the markets open Friday, GE is expected to report a 51% drop in first-quarter earnings to 21 cents a share, according to a consensus of analysts polled by Thomson Reuters. The company's revenue is forecast to drop 8% to $3.9 billion.

But the question on everyone's mind is 'what lies ahead for GE Capital?'

GE has maintained that it wouldn't have to raise capital from external markets to cover losses on the value of the loans issued by GE Capital, and that it wouldn't need to cut its dividend any further.

Not everyone is buying it. For one, some argue that GE's assumptions are based on overly optimistic predictions about when the economy will bottom out.

For example, GE's $2 billion-to-$2.5 billion profit forecast for GE Capital is based on average unemployment of 8.4% and GDP shrinking by 2% in 2009.

GE declined to comment for this story.

"The risk is that the economy will get worse. That's the big question, but the company feels it will improve," said Jim Ragan, analyst with Crowell, Weedon & Co.

If the economy continues to deteriorate, GE Capital could be "overwhelmed by losses" this year, said Citigroup analyst Jeffrey Sprague in a recent client note. And that could very well prompt GE to seek additional capital, despite its pledge not to.

It's no wonder analysts are skeptical.

In January, GE sought to soothe investors by saying the company wouldn't need to cut its dividend any further, that it would maintain its "perfect" AAA credit rating, and that GE Capital would earn $5 billion in 2009.

Since then, the company slashed its quarterly dividend to a dime on Feb. 27, had its credit rating downgraded one notch to AA+, with a stable outlook, on March 12 and cut its earnings forecast for GE Capital in half on March 19. That's not exactly batting a thousand.

Still, GE's March 19 meeting with investors to discuss GE Capital helped. With unprecedented transparency, the company gave multiple scenarios for the finance division's earnings in 2009.

Even if GE Capital breaks even, which GE says is the worst case scenario, the unit is set up to benefit from a hefty tax credit. But that would lower the quality of the company's earnings, say analysts, who would prefer to see profits driven by sales rather than one-time benefits.

The company's stock has rebounded, rising more than 20% from its March 19 meeting and surging nearly 85% from its March 5 low of $6.66 a share.

GE Capital's struggles, along with challenges at its health care division and expected losses at its NBC Universal unit tend to overshadow many strong divisions of GE, namely its services unit that makes and maintains turbines, jet engines and locomotive engines.

The company's infrastructure arm, which makes everything from steam turbines to solar panels, is also expected to perform well this year, especially if GE is able to successfully bid on some of the government's stimulus contracts.

That doesn't mean GE is out of the woods.

With businesses ranging from manufacturing to finance to media, GE is seen by many as a proxy for the broad U.S. economy. Accordingly, for the company's year-long tumble to bottom out and for GE to rise again, the conglomerate will be heavily reliant on the rebounding of the greater economy.