GE: More Disclosure, Please

Investors eye GE Capital's numbers in the wake of Enron

For years, the hottest product at General Electric Co. (GE ) hasn't been lightbulbs or even aircraft engines. It has been money. From extending almost $2.5 billion to Xerox (X ) for equipment financing to getting an $84 million bout of indigestion from Enron Corp. (ENE ) bonds, GE Capital seems to have a finger in almost every corporate pie. It has even dabbled in such oddball pursuits as car auctions and pet insurance. Many think its next target could be CIT, the financial arm of troubled Tyco International Ltd. (TYC ) "We are portfolio managers driving toward double-digit growth," says GE Capital Corp. Chairman and CEO Denis J. Nayden. "We're also very efficient acquirers."

Indeed. Investors credit this business-gobbling behemoth with helping its parent deliver remarkably consistent double-digit earnings growth. What began in the Great Depression as a credit operation to finance refrigerators has become a financial-services giant with 25 global businesses. It boasts more than $425 billion in assets and accounted for 40% of GE's $14.1 billion in earnings in 2001.

But in the wake of Enron's collapse, investors are increasingly unnerved by how tough it is to decipher GE Capital's opaque finances and the impact of its voracious acquisitions drive. Since Jan. 1, the confusion has helped send shares down almost 15%, to $35, though GE Chairman Jeffrey R. Immelt managed to stop the slide on Feb. 5 when he reconfirmed that GE would hit its 17%-to-18% earnings-growth target in 2002. "GE isn't a faith stock," Immelt insists. "It's a performance stock."

Perhaps. But critics say there's little in the way of specific numbers to back that up. Currently, the unit doesn't break out the performance of its businesses, which range from credit cards to insurance to the leasing of everything from jets to trucks. Instead, they are consolidated into five categories, so details such as loan reserves and losses are anyone's guess. And like its rivals, GE Capital often doesn't give information on the size of its acquisitions or what it paid for them.

Investors also complain that much of the information the unit does release isn't timely since it comes out in the annual report. And because it's not a bank, operations are not subject to the same level of regulation as other financial institutions. Investors say they can't even tell if it's true that only 3% of GE Capital's business comes from financing sales of GE's industrial products, as the company claims. "Disclosure is substandard," says Brian James of shareholder Loomis, Sayles & Co.

True, Immelt releases more numbers than his predecessor, Jack Welch. He does Webcasts and offers more details on individual units. "We're trying to be more accessible and clear," says CFO Keith S. Sherin.

But GE Capital could do a lot more. Its revenue and profit growth have vastly outstripped its industrial business over the past decade. Nayden says its earnings growth comes from one-third acquisitions, one-third internal growth, and one-third productivity gains. But investors contend that it's hard to confirm those numbers. Many also wonder how a huge collection of workaday finance businesses can continue to get double-digit earnings growth without an undue reliance on acquisitions. Most comparable rivals, such as Citigroup, sport rates of just 4%.

Even basic measures of return are open to debate. The company says GE Capital's return on equity is about 22% to 24%. But analysts such as Robert Friedman of Standard & Poor's favor adjusting for the unit's high debt-to-equity level, think runs at 8:1. By stripping out the debt, he gets a return of 5%. And Friedman estimates that GE overall generates a return on equity of just 9%, vs. the company's debt-inclusive figure of 27%. GE points out that its debt is on par with other financial-services companies and is factored into the unit's AAA credit rating.

Still, investors say they can't judge GE's health for themselves. "GE has more credibility than anybody else, but it has to disclose more to avoid being lumped in with companies that don't," says Rob Plaza of Morningstar Inc. Gary C. Wendt, who led the finance unit from 1986 to 1998, says that "what GE Capital does isn't rocket science." If that's true, it shouldn't take a rocket scientist to figure out its books.

By Diane Brady in New York

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