What happened to General Electric?

Yesterday, GE’s (GE) shares fell nearly 13% after CEO Jeffrey Immelt announced that quarterly earnings fell for the first time in five years. Even though Immelt had confirmed a positive earnings forecast for 2008 just in December, he blamed the lower earnings report yesterday on the credit market collapse.

The earnings report came as a shock, as GE had been reputable for consistently following its estimates.

What is GE?

GE consists of six divisions: GE Infrastructure, GE Industrial, GE Commercial Financial Services, NBC Universal, GE Healthcare, and GE Consumer Finance. The infrastructure division is the area where GE sees the greatest demand, consisting of energy, oil, rail, gas, and water.

Over half of GE’s revenue is derived from its financial services, which explains the dependence of their earnings on the credit market. Last quarter, the company was forced to write down the value of loans and Chinese securities it held, and was unable to follow through with the planned sale of its US credit card and Japanese consumer finance divisions.

However, the financial services division is not the only area with problems. The industrial division, which accounts for about 10% of overall revenue, also reported a 16% drop in first-quarter profit, which the company blamed on slowing consumer spending and a drop in housing starts in the US.

The only divisions to actually report profit growth were NBC Universal, whose profit rose 3%, and the energy-producing infrastructure division, whose profit rose 17%.

GE, the market barometer

Because GE is such a diversified industrial manufacturer, its performance is often viewed as an indicator of the state of the general economy. The DOW fell 2% Friday following GE’s lead.

Earnings season is just beginning. GE’s poor performance is likely just a preview of many disappointing reports ahead. Many corporations, like GE, delivered optimistic forecasts for 2008 late last year without realizing just how significant an impact the current economic weakness will have on all sectors.

Despite yesterday’s beatdown, GE has a strong track record of weathering decades of fluctuating economic conditions. GE CFO Keith Sherni has already reported that GE will lighten up on US exposure, heading back on track to sell its US private label credit card business. The drop in share price was mostly a shock response, and probably far harsher than deserved.

If GE continues to strengthen its infrastructure division and take advantage of growing worldwide demand for energy, it should soon be back on track to the consistent growth rate it has been known for.

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4 Responses to What happened to General Electric?

  1. tao2death says:

    But if we’re in a recession, isn’t GE a better short play at the moment? Historically, GE has had significant drops in value during recessions (almost half its value in the past downturn and 30% in ’87) with long lags before recovering. While I agree that it will eventually recover, I’d give it a few months before taking a long position.

  2. bumscientist says:

    I remember reading that people wanted GE to drop NBC since that division hasn’t been doing well since Friends ended.

  3. bumpstart says:

    I’m not going to speculate on where the stock price might go in the short term – I think it’s a safe bet for the long term, but you’re probably correct in that it will take some time to come back.

  4. haystackfarmer says:

    Well funny how you write this article. I bought some GE after the selloff at 32 and I’ll buy more if/when it hits 30. I think the downside is limited now that they’ve lowered forecast for the rest of the year.

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