General Electric Co Chief Executive Officer Jeffrey Immelt, poised to report a third straight decline in quarterly profit this year, may find investors focused on his plans for the GE finance units mired in the global market crisis.
The profit GE is turning this year as the biggest maker of jet engines and power-plant turbines is overshadowed by concern about lower earnings and potential land mines in its finance arm, GE Capital. Its bonds, which carry the top AAA rating, this week traded as though they were barely investment grade. GE shares reached five-year lows and fell for five straight days even after billionaire Warren Buffett bought in as a vote of confidence.
“It’s an issue for GE that’s going to keep pressure on the stock,” said Jim Bitter, an analyst at Wilmington Trust Co, which owned more than 8 million shares at the end of June. “If you’re big, you’ve got opaqueness. I don’t care how hard you try to explain things to people.”
Fairfield, Connecticut-based GE may say tomorrow it earned 45 cents a share in the third quarter, the average estimate of 14 analysts in a Bloomberg poll. That’s down from 50 cents a year earlier and within Immelt’s September 25 forecast of 43 cents to 48 cents. In April, a surprise drop in first-quarter profit spurred GE’s biggest one-day stock decline since 1987.
The world’s financial markets are in their deepest crisis since the 1930s, triggered by a drop in US housing values that raised mortgage defaults and caused credit markets to seize. Congress passed a $700 billion economic rescue package and the Federal Reserve two days ago tried to thaw markets further by creating a fund to buy US commercial paper, the financing tool that drives everyday operations for American business.
Backing From Buffett: Immelt, 52, told investors as the third quarter drew to a close that GE had the cash and resources needed to remain profitable and pay a dividend without having to raise outside capital or tap bank credit lines. As a precaution, he suspended a $15 billion share buyback and said GE won’t increase its dividend in 2009, the first year in more than three decades without a boost.
When asked on the September 25 investor call if GE envisioned a large new equity stake being taken by an outside investor, Immelt said “we just don’t see it right now.”
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Immelt doubled back less than a week later, gathering $12 billion from the public in a common-stock sale and $3 billion from Buffett, whose Berkshire Hathaway Inc bought preferred shares that carry a 10 per cent dividend. Immelt declined to comment for this story, spokesman Russell Wilkerson said.
Investors’ response after the Buffett infusion suggests GE may have to sell more assets than it’s already pegged for divestiture to persuade the markets of its financial health, said Nick Heymann, an analyst at Sterne Agee & Leach Inc in New York.
Driven by Liquidity: “This isn’t about external markets getting better,” Heymann, who has a “hold” on the shares, said in an interview. “This stock right now is driven by the ability to get more liquidity, which may necessitate further asset sales both from the financial services portfolio and from the non-financial services portfolio.”
GE rose 35 cents to $20.65 in New York Stock Exchange composite trading, the first increase since September 30. They have lost half their value in a year. The company, which issues commercial paper directly to customers, on October 7 cut the price of 30-day commercial paper by 45 basis points to 2.4 per cent, the lowest price in three weeks.
Immelt took over as CEO in 2001 and since then has divested more than $60 billion in businesses, including insurance, consumer finance in Japan, and an unprofitable foray into subprime mortgages before that market collapsed.
20/20 Hindsight: Instead of selling a private-label credit card unit in the US, GE will shrink the business in part by letting other companies bid for expiring contracts, Chief Financial Officer Keith Sherin said in a September 25 interview. Immelt reiterated his plan to reduce the finance units known collectively as GE Capital to 40 per cent of the total company’s profit by 2010, from more than half last year.
“Hindsight is 20/20,” said James Hardesty, president of Hardesty Capital Management in Baltimore, who counts GE as his largest holding among $700 million in assets and is adding to his position. “I wish they had done more in slimming their financial exposure down, but they did a lot before we got into the real rough going here in the last 18 months.”
The Standard & Poor’s 500 index has dropped 33 per cent this year as financial firms staggered under more than $592 billion in credit losses and writedowns.
Even so, Immelt repeated on October 1 that GE’s finance businesses may post a profit of $2 billion for the third quarter and $9 billion for 2008. Results will in part be clipped by $300 million to $500 million because of mark-to-market losses in a division where GE holds securities. GE also may increase consumer-finance loss provisions by about 30 per cent this year.
GE on September 25 said its non-financial segments, including NBC Universal, Energy Infrastructure and Technology Infrastructure, may have a third-quarter profit rise of 10 per cent to 15 per cent, while GE Capital will decline 25 per cent. Profit may fall 85 per cent at the GE Consumer & Industrial group, which is marked for spinoff in the first half of 2009.