GE Shocks Market with Profit Drop, Shares Tumble
BOSTON (Reuters) - General Electric Co posted an unexpected 6 percent drop in first-quarter profit on Friday, the biggest shock yet to American industry from the credit crisis and the latest sign the U.S. economy may be in a recession.
The second-largest U.S. company by market capitalization said profit fell about 20 percent at its financial services arms, which accounted for more than a third of GE's total revenue in the quarter. But weakness in health care and industrial divisions also weighed on results.
The news sent GE shares down more than 11 percent in early trade on the New York Stock Exchange, the sharpest drop in two decades, dragging down global markets.
"It's confirmation that we're in a recession," said Jerome Heppelmann, portfolio manager at Liberty Ridge Capital in Berwyn, Pennsylvania.
Profit from continuing operations totaled 44 cents per share, 7 cents below analysts' average forecast of 51 cents, according to Reuters Estimates. The company said also lowered its earnings forecast for the year, reflecting a slower economy and challenging capital markets.
"The financial services environment was very difficult and became even more difficult late in the quarter," said Jeff Immelt, chairman and chief executive, on a conference call with analysts and investors.
He said the financial services environment deteriorated sharply in the wake of the near collapse of Bear Stearns Cos last month.
"We experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments and this was something that we clearly didn't see until the end of the quarter," Immelt said, adding that financial services was responsible for 5 cents of the company's 7-cent-per-share miss of Wall Street's expectations.
"These results confirm that the slowdown is widespread and beginning to impact capex (capital expenditures) and longer-cycle businesses," said Stephen Surpless, senior analyst at Cantor Fitzgerald in London.
"While the credit crisis might be nearer to the end than the beginning, according to some, the impact on the real economy is taking place and is unlikely to abate in 2008," he added.
GE shares were down $4.23 to $32.53 in early trading on the New York Stock Exchange. So far this year they are down about 12 percent, more than double the decline of the Dow Jones industrial average.
BY THE NUMBERS
GE, which also has media and finance arms, reported a profit of $4.3 billion, or 43 cents per diluted share, compared with $4.57 billion, or 44 cents, a year earlier. Revenue rose 7.8 percent to $42.24 billion.
The sharpest drop in segment profit came at the conglomerate's financial divisions, with commercial finance down 20 percent and GE Money consumer finance down 19 percent. GE's finance arms make commercial and consumer loans, including financing purchases by corporations and individuals.
Profit at GE's industrial unit, which makes things like lighting and appliances, fell 16 percent and health care was down 16 percent.
Those declines overshadowed a 17 percent rise in profit at the infrastructure unit, which has been boosted by emerging-market demand for heavy equipment like electricity-producing turbines. NBC Universal's profit rose 3 percent.
"I thought they'd be doing better on the industrial and infrastructure side of things, thought that (would) have been enough to get over the hump," said Mike Gandrud, senior analyst at Optique Capital Management.
Goldman Sachs cuts its rating on the shares to "neutral" from "buy" on the news.
The company cut its full-year profit forecast from continuing earnings to a range of $2.20 to $2.30 per share. It warned that it foresees profit declines in the second quarter and through the full year at its financial services arms.
The new full-year earnings forecast, which calls for profit to be flat to up 5 percent, compares with an earlier view of "at least" 10 percent. Many on Wall Street had viewed that as a conservative forecast.
Revenue in the United States fell 5 percent in the quarter, with the pain stretching from the finance arms into the consumer-oriented appliance business, he said. Outside the United States, revenue was up 22 percent, Immelt said.
"We felt like it was wise to revise guidance for the remainder of 2008 to reflect today's market realities," Immelt said. "We are really assuming no improvement during the year."
(Additional reporting by Jennifer Coogan and Nick Zieminski in New York, Sitaraman Shankar in London and Blaise Robinson in Paris; Editing by Derek Caney)
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