GE Restatement Knocks Shares

The conglomerate reports a solid quarter and makes positive noises about its business repositioning, but investors bail

General Electric (GE)'s CEO Jeff Immelt has been trimming away the sluggish parts of the diversified conglomerate and adding investments in hotter sectors like aviation during recent months. He confirmed on Jan. 19 that he's thinking about selling the company’s plastics business, which has grappled with challenges, including high costs. But most of the Fairfield, Conn. company’s various businesses have been posting stronger growth. The company announced double-digit fourth quarter earnings on Jan. 19 and forecast better times ahead.

Overall GE earned $6.6 billion, or 64 cents per share, during the fourth quarter, up 12% from the $3.2 billion, or 30 cents a share, in the same period last year. The performance was driven by growth in its GE Money (formerly GE Consumer Finance,) healthcare, infrastructure, and commercial finance businesses. Even GE's troubled television unit, NBC Universal, finally managed to beat its profit by 5% compared to last year, earning $841 million during the quarter. Only GE's industrial business, which includes the troubled plastics unit, lost ground with a 12% drop year over year to $673 million of profit.

How long will this growth last?

"Looking ahead, the global environment remains positive for GE," Immelt said in a press release accompanying the income report. "Our businesses are positioned to capitalize on the drivers of the global economy - demand for infrastructure around the world, growth in emerging markets, favorable demographics, environmentally favorable technology, increasing use of digital connections, and robust liquidity in the financial markets."

GE expects earnings per share of $2.18 to $2.23 for 2007, up 10% to 12% compared to 2006. During the first quarter of 2007, the company expects profit of 43 cents to 45 cents per share, 8% to 13% higher year over year.

Still, the news wasn't all good. GE said it's adjusting its accounting of "interest rate swaps," which are a kind of investment involving a bet on the direction of lending rates. The company will restate its financial results for 2001 through 2005, as well as the first three quarters of 2006, resulting in a cumulative earnings reduction of $343 million.

And GE said it's thinking about selling its plastics business. "We continue to exit slower growth and more volatile businesses," Immelt said.

Not that GE isn't buying, too. The company has announced $15 billion of acquisitions since the beginning of the year in sectors such as oil & gas, healthcare and aviation. In a recent example, GE's $8.1 billion plan to buy about two-thirds of Abbott Laboratories' (ABT) diagnostics business were announced on Jan. 18. That deal was the second for GE in three days. On Jan. 15, the conglomerate announced it would pay $4.8 billion for the British aviation-parts maker Smiths Aerospace (see, 01/18/2007, "A Diagnostics Deal for GE and Abbott.")

"We think recently announced acquisitions and divestitures help position GE for (long-term) growth," Standard & Poor's Corp. analyst Richard Tortoriello said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) "We view GE well positioned to profit from strong global trends." Tortoriello upgraded GE's shares to strong buy from buy.

GE shares slipped 2.8% to finish the week at $36.95 on the New York Stock Exchange. The stock has slipped about $1 so far in 2007, and is up about 12% over the past year.

"General Electric's GE fourth-quarter results ... were impressive but in line with what we were expecting," said Morningstar analyst Peter Smith.

Before it's here, it's on the Bloomberg Terminal.