Immelt Keeps His Word

Posted by: Jena McGregor on October 10, 2008

This morning, General Electric chairman and chief executive officer Jeffrey Immelt met his lowered bar. The battered conglomerate, pummeled recently by its exposure to the financial services sector, reported third-quarter earnings that were 22% lower than a year earlier, but in line with expectations at $0.45 a share. The report comes two weeks after Immelt said on Sept. 25 GE would miss its earnings guidance for the second time this year.

One thing likely to comfort investors in all the turmoil is that Immelt kept his word—the announcement didn’t produce any big surprises. As the market fretted over the fate of AIG and Lehman Brothers on Sept. 14, GE issued a statement on its financial business designed to reassure the market. At the time, analysts wondered why GE didn’t reiterate its third-quarter guidance in the statement. About 10 days later, on Sept. 25, the conglomerate warned its earnings would be lower, saying it would also freeze its dividend and suspend stock buybacks. In the conference call, an analyst asked if the idea of any new equity offerings were off the table. “We just don’t see it right now,” Immelt responded.

A week later, on Oct. 1, GE turned around and announced it would sell $3 billion of perpetual preferred stock to Warren Buffett and issue $12 billion in common stock to the market. GE says the shift was a response to the rapidly changing financial picture, as further banks failed in the interim. But the trickling out of bad news left some investors wondering what could happen next. “This is the Chinese water treatment,” said Jim Hardesty of Hardesty Capital Management, which owns GE shares. “And I’m getting pretty wet.”

Today’s earnings report “could have been a lot worse,” one analyst noted this morning, and was careful to lay out GE’s shored up liquidity position. Still it also shows the big challenges that lie ahead. Delinquencies are up at GE Capital, forcing the company to make higher reserves. The financial crisis is thwarting Immelt’s efforts to reshape GE’s portfolio; he said this morning he’s running the private label credit card business, which he was in the process of trying to sell, “to hold” while GE evaluates options. A planned spin-off of the conglomerate’s iconic lighting and appliances unit will also be much harder.

Analysts raised concerns about how the global recession would impact the industrial business, which GE has repeated is its current source of strength. In a research note about the industrial sector issued Tuesday, Morgan Stanley analyst Scott Davis wrote that “the nearly frozen credit markets and expected government-budget shortfalls could make 2009 the worst construction/infrastructure year in modern history.” He noted that GE could face headwinds in its medical and aircraft engines aftermarket businesses.

So far, GE’s industrial business is being helped by the steady business of servicing equipment and a high number of less risky government-backed orders. Growth was very strong in energy infrastructure, where profits grew 31%, and GE says its backlogs are good and that it isn’t seeing much in the way of cancellations. Infrastructure orders were up 9%, slightly lower than its revised guidance of 10% two weeks ago.

Holding on to GE’s much-vaunted top talent with a stock price of $19 a share, almost 49% lower since the beginning of the year at this writing, could be challenging too, even as the employment market darkens. Morale is likely to suffer in parts of the business, like NBC Universal, dragged down by GE Capital. In a town hall meeting with NBC employees Monday, Immelt warned employees that the recession was likely to take time to work itself out, urging them to “hold on to your dreams.”

—with Chris Palmeri in Los Angeles

Reader Comments

james

October 10, 2008 12:06 PM

don't expect Ge to grow every quarter, it is time for all of us to reliaze that corporate world is not steroid. There is no way always up, up and up?

Where is the law of gravity? come to reality is long over due.

Bob

October 10, 2008 12:17 PM

why not? If a company consistently generates a profit period over period, then the value of the company has increased, and therefore the value of the company's stock should increase too. The degree that it increases is subject to speculation though.

seylan

October 13, 2008 3:02 AM

Nevertheless, GE green curtained its earnings every quarter and painted a non-existent rosy picture. Immelt also delayed offloading loss maker subsidies such as GE's Japanese joint. Finally, Immelt goes begging to Buffet who is more than happy to provide his expensive equity at 10%. Tell me, are these mis-steps in par with GE's 'amazing ability" to foresee and forecast? In fact, did such an ability ever existed in GE in the first place?

sloane

October 15, 2008 7:31 PM

Dr. Tantillo, who has a marketing blog , did a post at the end of last week that expressed his confidence in GE and its brand, bringing up the fact that GE was able to weather the Depression and has proved adept at adapting to market conditions and meeting its Target Market's needs.

He does however, wonder whether GE Capital fits with the GE brand's 'core essentials' - "Should GE Capital ever have been part of this grand brand to begin with?  Is it 'Imagination at Work,' or the kind of brand extension that has little to do with a company’s core?"

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