CEO Immelt is under pressure to improve on the Q1 earnings flop, as GE says it plans to spin off its entire consumer and industrial unit
General Electric's (GE) announcement of its second-quarter earnings results on the morning of July 11 is shaping up to be one of the most closely watched events on Wall Street this summer.
Partly that's because profit results from the conglomerate, which counts everything from gas turbines to TV sitcoms among its product mix, have long been a bellwether for the health of the overall U.S. economy. And we all know how shaky that is nowadays. In addition, GE's July 10 announcement that it plans to pursue spinning off its entire GE Consumer & Industrial segment will have investors listening closely for CEO Jeffrey Immelt's discussion of the move. Divesting the consumer & industrial businesses, which includes GE's iconic lighting business and the previously announced sale of its appliances unit (BusinessWeek.com, 5/16/08), has long been expected by investors, but the focus on a spin-off should speed up the process. "There's an urgency to declutter and help people understand the evolution of what GE is going to be," says Sterne Agee analyst Nicholas Heymann.
But what's really training Wall Street's eyes on the Fairfield (Conn.)-based company's announcement is GE's unprecedented first-quarter earnings miss. Three months ago, GE shocked the Street by announcing earnings per share (BusinessWeek.com, 4/11/08) that were 7¢ below estimates, prompting its stock price to tumble nearly 13% in one day.
Making matters worse, the historic miss came just weeks after GE CEO Jeffrey Immelt issued a confident outlook. It was a most uncharacteristic jolt for investors who were accustomed to GE's consistent track record of meeting its numbers.
Investor "Fear Factor"
Since that date, the pressures on Immelt have only mounted. GE's stock price has fallen another 14% since Apr. 11. Six analysts have downgraded the stock, with a few calling for a breakup of the company that goes far beyond Immelt's current efforts to restructure the portfolio.
Immelt's predecessor (and BusinessWeek columnist) Jack Welch even went on CNBC on Apr. 16, saying Immelt had a "credibility issue" and was "getting his ass kicked." Welch later said his comments were interpreted incorrectly (BusinessWeek, 4/17/08), but that did little to change the fact of Immelt's bruised credibility on the Street.
The first step to restoring that credibility, of course, will be meeting his second-quarter earnings forecast, which most analysts believe the company will do. GE attributed its first-quarter miss primarily to the extraordinary credit-market turmoil following the Bear Stearns debacle, which prevented it from closing asset sales. Following the miss, GE revised its full-year earnings expectations downward and set second-quarter guidance at 53¢ to 55¢ per share, on $45 billion in revenues.
That's about flat to slightly higher than the second quarter of last year. Analysts are expecting earnings per share of 54¢, according to Thomson Financial. Sterne Agee analyst Heymann believes it's very likely GE won't turn in any negative surprises, and feels assured by GE Capital's relatively low exposure to "opaque, hard-to-value" securities that could prompt further writedowns.
But investors weary of the stock's long-term malaise will be watching for more than just whether GE meets its numbers. To remove the "fear factor" that has been weighing down the stock, says Heymann, investors will be looking for more transparency in the financial-services portfolio and more clarity on how much of GE's earnings per share comes from operations vs. asset sales.
Health-Care Business Is Key
They'll also be expecting an update on the status of two pending divestitures. GE is in the process of trying to sell its private-label credit-card business and its iconic appliances unit, a sale it announced in May (BusinessWeek.com, 5/16/08). With the housing industry decimated and consumer finances on the rocks, some investors have questioned the timing of these moves.
"Maybe they could have done that sooner," says Eric Schoenstein, co-portfolio manager of the Jensen Portfolio, though he admits hindsight is always helpful. "But at least by getting rid of [private-label credit cards], you take [some] consumer risk off the table."
Others will be watching for how well GE's health-care business fares. In the first quarter, earnings for the unit were down 17%, on flat revenues. Lower reimbursements for medical equipment affected demand and contributed to the weakness. Because Immelt ran this business before becoming CEO, and has positioned it as part of his strategy of meeting long-term demographic trends, investors are especially mindful of its performance.
"If [health care] starts to fail to meet your objectives," says Jim Hardesty, president of Baltimore-based Hardesty Capital Management, which owns GE shares, "where is everything else going to wind up?"