With GE reporting uninspiring growth for 2010, CEO Jeffrey Immelt has failed to impress Wall Street even as his behemoth reports profits.
"If that man doesn't get the stock moving, then he'll have to worry about whether he will have to move," said Sterne Agee analyst Nicholas Heymann, referring to Chairman and Chief Executive Jeffrey Immelt.
"People don't trust Immelt," said Dilip Sarangan, analyst for Frost & Sullivan. "A lot of people think he comes off too confident and too smooth ... and it's put a little pressure on the stock because nobody knows what he will say and how it might impact the price."
General Electric says its profit fell 6 per cent in the second quarter, as discontinued operations and loss provisions weighed on results.
Hartford, Conn.-based General Electric Co. says it earned $5.07-billion (U.S.), or 51 cents per share, compared with a year-earlier profit of $5.38-billion, or 52 cents per share. Total revenue has risen to $46.89-billion from $42.38-billion a year earlier.
On the basis of continuing operations, GE says it earned $5.39-billion, or 54 cents per share. Thomson Financial says analysts expected the company to report earnings of 54 cents per share on revenue of $45.31-billion.
In a statement, GE Chief Executive Jeff Immelt said the U.S. economy is “challenged” but many other markets are healthy.
Credit squeeze and world wide financial dislocation will only hurt earnings quality further. The technical price action in GE suggests lower prices. What will happen if markets other than than the US economy deteriorate? I think we should hope for the best, but expect and prepare for the worst.
Go look at the 10K or the 10Q! They have 8Billion in Tangible Assets and 800Billion in Total Assets! Thats 100x times leverage! Now that is not totally fair as you need to strip out GE industrial. But do that and the assets are still greater than 600 billion. By the way that means that if they lose 1.6% or more on their assets they are bust... The only question is how much less than zero GE Cap is worth. I will not argue that GE Industrial is a good company. But one must consider that GE Medical is not going to fare well in an Obama presidency and turbines, trains and windmills will be hard to sell to cash strapped states.
GE's diversification reduces the impact of strong performance in any one market. For example, one of the primary bullish arguments for GE on wikinvest cites NBC's "hit shows." When it comes down to it, (even if these were actually big hits) these hit shows only compose a part of NBC and by extension, an even smaller part of GE.
GE smoothes earnings by using questionable practices
Top Contributor: P A | Created when NYSE:GE was $19.63 | Edit | History
GE Capital, through timed end-of-the-quarter asset purchases and sales, is used to smooth earnings to meet market expectations on the nose again and again. This practice is unethical, and more importantly, dangerous. It means that investors don't get the real story if/when business performance starts to deviate from people's expectations, until the buffer runs out. Recently, GE missed targets, indicating that there isn't any buffer left in GE Capital. Admittedly, at these prices, GE is likely to be a good investment over time, but this earnings smoothing practice is enough to keep me away from the shares. I'd rather invest in a company that is honest and forthright with.
GE is one of the largest issuers of commercial paper - short term financing in the money markets - with $88 billion outstanding as of October 2008. Like the lending between banks, the commercial paper market has also seized up in recent months. Without investors willing to finance its gigantic operations, GE will be forced to scale back its operations.
In addition, GE generates roughly half of its profits from GE Capital, which invests in a wide variety of assets including real estate, credit cards, and mortgages. GE itself anticipates losses of $6.6 billion on GE Capital for 2008, rising to $7.5-$9 billion in 2009.
On March 12, S&P downgraded GE to a "AA+" credit rating from "AAA," decreasing the availability of credit to the company and increasing the company's cost of borrowing.
For the first time since December 1991, shares of General Electric Co. (GE) fell below the $6 mark. “The market is beginning to anticipate a downgrade to double-A territory,” Pacific Investment Management Co.’s Bill Gross said in an interview on CNBC. “We believe even with the downgrade, it’s a viable, safe, liquid credit going forward.
Standard & Poor’s today (Thursday) downgraded the AAA credit ratings for both General Electric Co. (GE) and its finance arm, GE Capital Corp. - a move that underlines the continued financial struggles of one of America’s largest, most iconic companies.
Standard & Poor’s cut its ratings for GE and GE Capital from AAA to AA+ with a “stable” outlook. GE had held the AAA rating since 1956, the year its chief executive officer, Jeffrey Immelt, was born.
It was Immelt who, in January, said that GE generates enough to cash flow to preserve the rating as well as the company’s annual dividend. But last month, GE cut its dividend for the first time since 1938. The company slashed its quarterly dividend by 68%, from 31 cents a share to just 10 cents a share. The smaller dividend payout is expected to save GE about $9 billion a year.
In December, Standard and Poor’s had said that GE had a one-in-three chance of losing its AAA rating within two years. Moody’s put GE under review in January and confirmed that the company’s current Aaa rating is at risk.
GE’s stock has tumbled more than 70% in the past year, in part because investors worry the company doesn’t have enough capital to counter an expected rise in delinquencies on loans issued by its financing arm. GE Capital accounted for about 47%, or $8.6 billion, of GE’s total profits of $18.1 billion last year.
Even though it just posted its third-highest annual profit ever, investors hammered shares of U.S. industrial giant General Electric Co. (GE) last week on a triple play of bad news:
Its first dividend cut in 71 years.
Speculation over a possible credit-ratings downgrade.
And growing worries that the once-unthinkable was becoming possible - a corporate bankruptcy that would put GE on the growing list of onetime Corporate America heavyweights that are now taking government bailout money.
GE’s biggest worries revolve around the company’s gigantic financial-services unit, GE Capital Corp., and whether it has adequate capital to counter an expected rise in delinquencies on its loans. Investors are also concerned about GE Capital’s accounting methods and how the company is valuing its vast real estate portfolio.
“Probably the biggest controversy surrounding GE right now is what the fair value of (GE Capital’s) $661 billion is if/when a write-down to fair value should occur,” BernsteinResearch analyst Steven Winoker wrote in a note to clients last week, Reutersreported.
Investors voted with their feet last week as GE shares were pounded - leaving the stock down 59% for the year. GE has lost about $266 billion in market value in the last 12 months.
And some Wall Street analysts think investors are right to abandon ship.
“We think investors have rightly questioned managements’ forecast and planning assumptions that continue to seem too optimistic and out-of-step with the environment,”
Merrill Lynch & Co. (MER) analyst John Inch wrote in a note to clients.
GE Vice Chairman and Chief Financial Officer Keith Sherin said Thursday that he sees no need to raise additional capital, and noted that the company’s financial-services businesses expect to be profitable in the first quarter of 2009 and all year, Bloomberg News reported.
Sherin also said GE will host a GE Capital investor meeting later this month to examine the “hot spots in the company, including real estate, U.S. consumer [finance], global mortgage with a focus on U.K. home lending, and central and eastern Europe exposure.”
But many Wall Street analysts - already questioning GE Capital’s valuations of its real estate and other holdings - are watching GE’s comments with a skeptical eye.
GE could be overestimating the value of some of it real estate portfolio, said BernsteinResearch’s Winoker. Winoker calculates that the company’s real estate equity is worth about $20 billion, rather than the $32.7 billion GE estimated at the end of 2008. If that were true, that would represent an overestimate of more than 60%.
GE Capital has vast real estate holdings in the United States and around the globe, making it an important cog in GE’s operating results. Overall, GE Capital accounted for about 47%, or $8.6 billion, of GE’s total profits of $18.1 billion last year. The company projects the unit will earn $5 billion this year.
GE has stakes in 8,000 properties in 2,600 cities worldwide, including office buildings, warehouses and apartments. About 71% of those properties are located outside the United States.
In Europe, GE has $22 billion worth of real estate assets. About one-third of that was real estate debt and non-performing loans at the end of the second quarter of last year, according to its Web site.
“They spent a huge amount of money in real estate,” James S. Corl, who oversees distressed real estate investments at Siguler Guff & Co., told Bloomberg. “They paid a full price for what ends up being a lot of mediocre real estate.”
Profit at GE Real Estate dropped by $1.1 billion, according to GE’s annual report. GE’s real estate profits probably have further to fall, as occupancies and rents continue to drop.
“Did we end up with too much exposure in certain areas during the credit bubble? Maybe, a few,” said GE Chief Executive Officer Jeffery Immelt in his annual letter to shareholders, released March 2. “Today, I wish we had less exposure to commercial real estate and U.K. mortgages.”
Real Estate Accounting - “Look Out Below”
Meanwhile, how the company accounts for its real estate holdings has raised eyebrows on Wall Street. GE values its properties at the price it paid for them, depreciating the values over time, rather than periodically marking them to their current market value - the latter practice known as fair-value accounting, or “marking to market.”
GE Capital “has staunchly defended its long-term hold position for real estate assets, allowing it to carry positions at historical cost (and depreciate those values over time), rather than marking-to-market, which we imagine could turn into a ‘look-out-below’-type exercise in the current climate,” wrote CreditSights Inc. analysts Richard Hoffman in a March 3 note to investors.
“We conservatively believe there could be 5% to 13%, or $4.3 billion to $11.0 billion, of cumulative losses/write-downs in the commercial real estate portfolios,” Nicholas P. Heymann, an analyst at Sterne Agee, a Birmingham, Ala.-based brokerage, and a long-time follower of GE, wrote in a note to investors last week.
“Furthermore, our analysis of the commercial real estate portfolio indicates the company’s holdings are concentrated in markets that are early in the credit deterioration/vacancy cycle,” Heymann wrote.
Credit Rating Under Review
Another question facing GE is what will happen to its current top-notch credit rating.
Many on Wall Street expect Moody’s Investors Service (MCO) and Standard & Poor’s to cut GE’s “triple-A” credit rating to “double-A.”
Moody’s said Jan. 27 that it’s evaluating whether to lower GE’s rating, which typically takes about 90 days. GE cut its dividend Feb. 27 for the first time since 1938, saving $9 billion a year.
GE would be subject to an $8.2 billion collateral call if its rating was lowered to “A+2″, BernsteinResearch’s Winoker wrote in last week’s client note. A much deeper cut - to “BBB+” - means GE would be looking at an additional payment of $2.9 billion.
Winoker also noted that, while he thinks GE will need to mark down the value of its financial portfolio over time, a large-and-immediate write-down is unlikely.
“We think such write-downs, if needed, would be spread over several years, which will lessen the need for equity [infusions], but [which] will hurt long-term earnings,” he said.
Inch, of Merrill Lynch, also considers it unlikely GE would have to raise additional capital. But he warned that if the situation changes, GE could find it difficult to raise much money in the equity markets, due to its low stock price.
If GE Capital did face a funding crisis, Inch believes the U.S. government may bail it out to block a bankruptcy filing or a spin-off, considering the lender’s huge role in the U.S. financial system.