GE cuts forecast, citing wounded financing unit
HARTFORD, Conn. — General Electric Co., the industrial powerhouse that makes everything from jet engines to light bulbs, cut its earnings forecast for the year on Thursday, blaming volatile financial markets that have damaged the profitability of its loan and lease business, which accounts for almost half its income.
GE, a bellwether of the U.S. economy, warned that its GE Capital unit would face "difficult conditions in the financial services markets that are not likely to improve in the near future."
Thursday's announcement came as Wall Street grappled with the collapse of Lehman Brothers, the government takeover of insurer AIG, and fierce debate over a $700 billion plan for Washington to bail out banks weakened by risky mortgage-backed securities.
That turmoil has hurt GE Capital, the company's financial business that provides consumer financing for car loans, mortgages outside the United States, and credit cards. Its commercial side finances real estate, corporate lending and leases jets.
The unit has been caught in the downdraft hurting financial services stocks. Since mid-September, when the financial markets were rocked by the news of Lehman and AIG, GE's share price has fallen about 23 percent.
The U.S. Securities and Exchange Commission this week added GE and others to a list of companies whose stocks are affected by a temporary ban on short-selling _ a legal Wall Street practice in which investors profit when a stock drops.
GE Chairman and CEO Jeff Immelt was not encouraging about GE Capital's short-term prospects
"We expect to see higher losses and loss provisions and lower gains," he told analysts in a conference call Thursday.
The parent company now expects profit for the year to fall about 10 percent, to between $19.5 billion and $21 billion, or $1.95 to $2.10 per share, from its prior forecast of $22 billion to $23 billion, or $2.20 to $2.30 per share.
On average, analysts surveyed by Thomson Financial had expected per share profit of $2.21.
GE, which also owns NBC-Universal, anticipates earnings from financial services will total 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.
Still, the company does not plan to exit the business, which analysts say has been hurt by write-downs in England's weakening mortgage market and delinquencies at its credit card business.
"We don't think that business model is broken," Immelt told CNBC.
A portion of the financial side of GE's business helps customers finance the purchase of big-ticket industrial products. As a result, GE would not likely shed all of its financial business, said Eric Boyce, portfolio manager at Hester Capital Management in Austin, Texas.
GE has already quit the subprime mortgage business, insurance and other financial segments. On Thursday, it announced it closed this week on the $5.4 billion sale of its Japanese consumer financing business.
Shares of GE, a Dow Jones industrial component, closed Thursday up 4.4 percent, or $1.09, to $25.68 amid a broad rally on Wall Street. They have traded between $22.16 and $42.15 in the past 52 weeks.
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.
The Fairfield, Conn.-based company does plan to reduce its dependence on GE Capital, whose size and importance at the industrial giant surged under Jack Welch, the company's previous CEO, and his successor, Immelt.
Chief Financial Officer Keith Sherin told analysts that a smaller, more focused unit was better for investors in the current environment. After scaling back, GE aims to get 40 percent of its earnings from financial services and 60 percent from industrial business by the end of 2009, compared with a near even split currently.
For now, however, GE has given up its search for a buyer of its $30 billion private label credit card business. "That hasn't gotten any better in the last three weeks," Sherin told analysts.
GE also plans to boost the capital for GE Capital, reduce the earnings dividend the unit must pay the parent company to 10 percent from 40 percent and suspend the current GE stock buyback. Through the third quarter, GE has repurchased about $3.5 billion worth of shares.
Before the suspension, GE was in its first year of a three-year, $15 billion repurchase plan.
GE also will maintain through next year its 31 cent-per-share quarterly dividend, the first time in 32 years that shareholders will not receive an increased dividend.
GE Capital does not need to raise any additional long-term debt for the remainder of 2008, the company claimed. 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, totaling $1.24 per share annually, through next year.
Analysts applauded GE's moves to shore up the unit's finances.
"In a tough environment we like what they have to say," said analyst Mike McGarr of Becker Capital Management in Portland, Ore.
McGarr also noted that GE Capital will turn a profit for its parent. "It's going to make $2 billion this quarter in a lousy environment." He added that the write-downs in England's mortgage business and credit card delinquencies reflected "pockets of weakness."
On its industrial side, GE said business looks robust.
"Our industrial business fundamentals remain very strong," Immelt said, noting that long-cycle industrial and service orders are expected to be up double digits in the third quarter.
"There is still a world out there that's buying stuff," whether it be wind turbines or spare engine parts, he told CNBC.
The company reaffirmed its commitment to maintaining a 'AAA' credit rating.
Analyst Deane Dray of Goldman Sachs said in an investor's note that GE is taking a "number of welcomed steps" to reduce leverage and diversity its funding strategy.
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.
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.
For the third-quarter, GE sees a profit of 43 cents to 48 cents per share _ down from prior guidance of 50 cents to 54 cents per share. On average, analysts surveyed by Thomson Financial have forecast quarterly earnings of 52 cents per share.
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Associated Press Writer Jennifer Malloy in New York contributed to this report.
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STEPHEN SINGER | September 25, 2008 05:31 PM EST |
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