GE relies on cost cuts, tax dip in tough quarter

By Scott Malone - Analysis

BOSTON (Reuters) - They say nothing is certain but death and taxes. Tell that to the shareholders of General Electric (GE.N).

The largest U.S. conglomerate reported earnings on Friday that beat expectations despite a drop in revenue that was more dramatic than Wall Street had predicted. Those earnings reflected the pay-off from major cost-cutting over the past year, a greater reliance on the high-margin service business but also a sharp drop in the company's tax rate.

Thanks to higher loss provisions at the company's hefty GE Capital finance arm, the company's tax rate fell to 7 percent from 16 percent a year ago, a change that helped the bottom line, but which some investors consider a sign of poor "earnings quality."

"Earnings quality did play a role again," said Edward Jones analyst Matt Collins. "You had a 7 percent tax rate in the quarter, so clearly that was a factor. They are seeing benefits from restructuring that they had taken previously."

While companies across the economy are cutting jobs, closing facilities and looking for any other ways to bring costs in line with falling revenue, some investors note there is a limit to how long companies can rely on belt-tightening to hold up their profits.

"It's not sustainable," said Peter Klein, senior portfolio manager at Fifth Third Asset Management, which owns GE shares. "The story of the second quarter is that a lot of companies are reporting better-than-expected earnings, but it's coming all through the middle."

U.S. companies including International Business Machines Corp (IBM.N), Johnson & Johnson (JNJ.N) and Google (GOOG.O) this week have reported earnings that topped Wall Street's expectations in part because of the benefits of cost-cutting.

RISKY LINE TO WALK