GE lowers third quarter forecasts

September 25, 2008 12:41:52 PM PDT
General Electric Co., whose shares have been battered by anxiety over the health of its big loan and lease business, lowered its earnings forecast on Thursday, saying the unit's profits were falling and that it was taking action to bolster its reserves. The moves, which GE said were prompted by "unprecedented" weakness and volatility in the markets, come as Wall Street grapples with the collapse of Bear Stearns and Lehman Brothers, the government takeover of insurer AIG, and the fierce debate over a $700 billion plan for Washington to bail out banks weakened by risky mortgage-backed securities.

GE Capital, the company's financial business that provides consumer and real estate financing, and corporate lending and leasing, has been caught in the downdraft hurting financial stocks in recent weeks. The unit provides nearly half of GE's profit.

Chairman and CEO Jeff Immelt, speaking to analysts in a conference call, was not encouraging about GE Capital's financial future.

"We expect to see higher losses and loss provisions and lower gains as the economy evolves," he said.

Shares of the Dow Jones industrial component and industrial bellwether slipped 5 cents to $24.54 late morning trading after trading as low as $23.50 earlier in the session. Its 52-week high was $42.15.

GE said its profit for the year will be about $20 billion, down 10 percent from 2007, and that it expects its financial services businesses will earn about $2 billion in the third quarter. In the second quarter, the GE Money and Commercial Finance segments made a combined profit of $2.45 billion.

Chief Financial Officer Keith Sherin told analysts that GE is aiming to reduce the size of its financial business.

"A smaller and more focused financial services enterprise in this environment is better for investors," he said.

The company, which makes everything from jet engines to health care technologies and owns NBC television, expects continued earnings strength in its other business.

Overall, Fairfield, Conn.-based GE forecast third-quarter profit of 43 cents to 48 cents per share - down from prior guidance of 50 cents to 54 cents per share. For the full year, profit is now forecast between $1.95 and $2.10 per share, instead of $2.20 to $2.30 per share.

On average, analysts surveyed by Thomson Financial have forecast quarterly earnings of 52 cents per share and full-year profit of $2.21 per share.

In a move to trim debt ratios, GE said it will boost capital in its GE Capital division by reducing the dividend the unit pays GE on its earnings to 10 percent from 40 percent, which Sherin said will enable the company to put more money into GE Capital.

GE also is suspending GE's stock repurchase program. Through the third quarter, GE has repurchased about $3.5 billion.

The company also reaffirmed its commitment to maintaining a 'AAA' credit rating, and outlined steps to bolster its capital and liquidity position - including restructuring GE to boost the ratio of industrial earnings to financial profits to 60 percent-40 percent by the end of 2009.

GE Capital does not need to raise any additional long-term debt for the remainder of 2008, the company asserted, but said it will reduce GE Capital's commercial paper to between 10 percent and 15 percent of the financial services unit's total debt going forward.

GE's board also said it would maintain a 31 cent quarterly dividend and $1.24 per share annually through next year.

Standard & Poor's Ratings Services on Thursday affirmed its 'AAA' long-term and 'A-1+' short-term corporate credit ratings for GE and on GE Capital Corp. and its 'A-1+' short-term rating on General Electric Capital Services Inc.

GE Capital Corp. "continues to significantly outperform the majority of its peers among large financial institutions, owing to its broad product and geographic diversity, and conservative underwriting standards," Standard & Poor's said.

The outlook on GE and GECC is stable, Standard & Poor's said.

Moody's also said GE's revised earnings support ratings of Aaa long term and Prime-1 short term. The ratings outlook is stable, it said.

"Moody's believes that GE's planned actions to address the additional risks resulting from the heightened volatility in the global capital markets are appropriate and necessary," the ratings agency said.

It said GE will operate GE Capital with a reduced reliance on short-term capital markets and build liquidity reserves.

Since April 10, the day before GE stunned Wall Street by widely missing the mark on its first-quarter earnings, its share price has tumbled by one-third, wiping out $87.6 billion in market capitalization, or 26 percent since late April.

Just since mid-September when the financial markets were rocked by the Lehman and AIG problems, GE's share price fell by 23 percent.


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