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Peek behind GE's curtain did more damage than good for investors


Tired of getting relentlessly pummeled in the press, Jeffrey Immelt, CEO of GE (Symbol: GE), decided to fight back with a little transparency this week. Top execs spent six hours — six HOURS* — explaining the inner workings of GE’s complicated finance arm to big investors yesterday. The presentation included how GE Capital’s profits might be hit under different economic scenarios. And that seems to be where the company’s executives lost the investment community.

GE’s shares, down 75% over the past year, closed down 6% to $9.54 share today. As the conference call was getting rolling on Thursday, the shares had rallied slightly, topping out at $11.35. But as more details poured forth, investors lost faith.

GE offered three scenarios. Its GE Capital unit could make $5 billion if growth in the U.S. drops 1.8% or less and unemployment averages 7.7%. That’s the profit estimate GE offered back in December. If the economy shrinks 2% and unemployment averages 8.4% — the Federal Reserve’s baseline estimate — GE Capital would make only $2 billion to $2.5 billion, the company now says. And if unemployment averages 8.9% and the economy shrinks 3.3%, the unit would just break even. Last year, GE Capital reported profits of $8.6 billion.

But by offering a worst case scenario that seems a bit tepid for the economic times, GE prompted investors to ask what if things get even worse? It’s certainly possible. Analysts at Citigroup, Deutsche Bank, Morgan Stanley and Credit Suisse aren’t waiting around to find out. All four dropped their estimates for GE’s 2009 profit.

Another concern arising out the meeting was GE’s explanation of how some of GE Capital’s net income would come from the accounted value of tax credits, not actual cash profits, as losses from bad debts mount. Under the worst-case “break even” scenario, for example, GE Capital would have a pre-tax loss of $4.5 billion wiped out by tax credits.

* Bloomberg called a six hour meeting while at Dow Jones it was only five.


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