GE 3Q profit off 22 pct, meets forecast

October 10, 2008 4:27:10 PM PDT
General Electric Co. spared investors any nasty surprises as it reported a 22 percent drop in third-quarter earnings on Friday, meeting its own lowered forecast and blaming the decline on its struggling finance arm. The company's loan and lease business has been hammered by the worst financial crisis since the 1929 stock market crash. GE, which also makes everything from jet engines to water treatment systems and owns NBC Universal, reported net income of $4.3 billion, or 43 cents per share. Sales rose 11 percent to $47.23 billion.

A year earlier, the company earned $5.56 billion, or 54 cents.

The Fairfield, Conn.-based company has cited softening profits at GE Capital, which provides financing ranging from consumer car loans to energy project lending. Since the spring, troubled credit markets and waning confidence in global financial systems have cut into profits there. GE has lowered its 2008 earnings forecast twice since April, announced a reorganization and raised capital through the sale of $15 billion in stock, including $3 billion in preferred shares to Warren Buffett's Berkshire Hathaway Inc.

Analyst Nicholas Heymann of Sterne Agee in New York said investors are nervous that GE may lower its full-year forecast again.

"Investors are saying. 'We see two adjustments before we get into rough seas. How many are we going to see when we're in rough seas?"' Heymann cut his 2009 earnings estimate to $1.85 from $2 and reduced his six-to-12 month price target to $17 from $20. His 2008 forecast remains at $2.

Shares of GE rose $2.49, or 13.1 percent, to $21.50 Friday as the broader market swung wildly. GE is down by 42 percent since April 10, the day before GE shocked investors by widely missing its target for the first quarter.

The latest results, the third straight quarter of diminishing profits, were dragged down by a 33 percent decline in profit at GE Capital and an 82 percent drop in profit at GE's consumer and industrial unit, which makes appliances and other products. GE plans to spin off or sell that unit.

GE remains on track to meet its 2008 earnings forecast, which it lowered by about 10 percent last month to between $19.5 billion and $21 billion. GE Capital is on track to earn more than $9 billion for the year, it said.

Citigroup analyst Jeffrey Sprague told investors in a note Friday that while GE has "some outstanding assets and a solid AAA balance sheet," its operating performance is uneven and its finance portfolio is risky.

"We believe GE may have reached the point that its size and complexity have become a hindrance to effective management," Sprague said, although he maintained his "Hold" rating on GE, citing good cash flow and a high dividend yield among its strengths.

Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, said GE under Chief Executive Officer Jeff Immelt is doing relatively well in bad times.

"They're saying things are going to be slower, but they hit their plan," he said.

Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, said Immelt is doing well with the exception of a poorly performing health care business, where profit fell 8 percent to $634 million in the quarter.

Sorrentino said he cannot say that Immelt has "absolutely got it, he's nailed it," but "erecting the gallows, I'm not there yet, either."

GE's huge industrial business remained solid. GE expects growth to continue, helped by strong orders in its infrastructure business, which makes water treatment plants, energy projects and other large-scale items. GE's total orders backlog stands at $170 billion, up 20 percent from last year.

Immelt highlighted GE's energy business, which makes gas and wind turbines. The sector earned $1.4 billion in the quarter, up 31 percent. At NBC Universal, which benefited from its Olympics coverage in Beijing in August, profits totaled $645 million, up 10 percent from a year earlier.

Some analysts have said GE should sell NBC because it does not fit the company's industrial and commercial business mix. However, Immelt has defended the media franchise, and its performance - particularly in comparison with GE's faltering financial business.

"Cable and films had a solid quarter and the success of the Beijing Olympics showed the value of the network model," he said.

Immelt said GE has taken steps to reduce its leverage and improve liquidity to protect the top AAA rating on its bonds.

Earlier this month, GE raised $12 billion in a common stock offering and $3 billion from preferred shares sold to Warren Buffett's Berkshire Hathaway Inc. However, the preferred stock carries a costly 10 percent dividend.

Last month, GE lowered its third quarter forecast to between 43 cents and 48 cents per share from its prior range of 50 cents to 54 cents.

General Electric ended the quarter with $88 billion in commercial paper, a type of debt that big U.S. corporations sell to get short-term cash, often to maintain inventories and payrolls.

The trillion-dollar market for these crucial short-term IOUs is under strain, with outstanding issues falling for the fourth straight week as of Oct. 8, and down 30 percent from the summer of 2007.

GE Chief Financial Officer Keith Sherin told investor analysts in a conference call Friday that GE will reduce commercial paper to $80 billion by the end of the year.

At quarter's end, the company had $88 billion in commercial paper, down from $100 billion earlier this year, GE said.

"We have had no problems with our own (commercial paper), but I think we have just taken this issue off the table for investors," Immelt told analysts Friday.

The $15 billion of recent stock sales "gives us more cash, and now the backup lines plus cash are greater than (commercial paper)," Immelt said.