GE Dips Below $10, Lowest Since ‘95, on Finance Unit (Update2)
By Jeff Kearns and Rachel Layne
Feb. 20 (Bloomberg) -- General Electric Co. tumbled to the lowest since 1995 and became the fifth Dow Jones Industrial Average stock to slip below $10 after Sanford C. Bernstein & Co. forecast an unprecedented profit drop at its finance unit.
GE’s units may collectively post an operating profit decline of 23 percent, the bulk of which is driven by a drop in GE Capital, Bernstein analyst Steven Winoker wrote in a note. He cut his 2009 income estimate by 3.3 percent to $1.18 a share, below the $1.28 average of 14 analysts in a Bloomberg survey.
“We forecast 2009 revenue and earnings declines never seen before at GE Capital due to the extreme severity of the current economic downturn,” the analyst said. “GE’s financial services exposure is still uncertain with downward risks.”
Bank stocks in the S&P 500 lost 41 percent this year after plunging 57 percent in 2008. GE, which gets 37 percent of its revenue from the capital unit, has lost 42 percent since the start of the year, according to data compiled by Bloomberg.
GE, the only original Dow Jones Industrial Average member, tumbled 6.8 percent to $9.38, the lowest close since June 1995, and earlier fell as low as $8.98. It joined Alcoa Inc., Bank of America Corp., Citigroup Inc., General Motors Corp. among Dow companies to sink below $10.
Moody’s Investors Service and Standard & Poor’s Corp. are considering whether to lower GE’s debt ratings from the highest- possible AAA, and Chief Executive Officer Jeffrey Immelt and the board said Feb. 6 they are reviewing whether to maintain the level of the dividend in the year’s second half. A dividend cut would be GE’s first since at least 1940, according to New York Stock Exchange records.
Share Price Forecast
Bernstein’s Winoker also reduced his share-price forecast for the Fairfield, Connecticut, company by $1 to $14. The New York-based analyst maintained his “market perform” rating.
“We expect additional market driven earnings deterioration will spread across the ‘industrial’ businesses,” Bernstein’s Winokur wrote. “The combination of potential credit rating downgrades, dividend cuts and additional infusion of cash into GE Capital lead us to a cautious stance on the company.”
Today’s stock decline may be tied to an anticipated cut in ratings, said Bill Batcheller, who co-manages $700 million in assets including GE shares at Butler Wick & Co. in Youngstown, Ohio. “Certainly it’s not going to help, and it may provide cover to go ahead and do it, if that’s the inclination of the agencies,” he said in an interview. “The lower the equity price goes, the less financing flexibility the company has.”
Shrinking Finance
GE in December said it would stop giving per-share forecasts and instead provided a “framework” for $5 billion in earnings at the finance division. Profit at other major divisions including the world’s biggest makers of jet engines, power-plant turbines and medical imaging equipment would range from zero to as much as 5 percent.
Immelt is shrinking the finance unit to 30 percent of total earnings, down from about half in 2007. This month he said that while he believes GE had the earnings power to keep both the payout level of the century-old dividend and the top debt rating, he was prepared to run GE “as a double-A” if needed and that a downgrade was ultimately out of his hands.
On Feb. 10, GE Chief Financial Officer Keith Sherin described GE’s loss-coverage and reserve ratios in areas including credit cards and mortgages to feed more detail to investors who say GE Capital may be under-reserved. The company doesn’t have any U.S. residential mortgages after it sold WMC mortgage in 2007.
‘Substantial’ Exposure
“GE’s exposures to consumer and commercial lending categories materially impacted by the ongoing global economic downturn remain substantial as the company looks to de-lever, rein in risk and position the portfolio for an ultimate recovery,” wrote Richard Hofmann, an analyst with Creditsights Inc., in a report yesterday. He expects Moody’s and S&P to cut the debt rating to “the AA category,” where Creditsights itself rates the debt.
Sherin told analysts the company aims to get to the $5 billion profit goal this year even by absorbing $1 billion more in bad business than forecast in December, or about $10 billion total. Analysts estimate profit at an average of $3.6 billion, Sherin’s presentation showed, acknowledging concerns from reports in the past month that show the absorption estimate as too low.
GE on Jan. 23 said it has $4 billion in unrealized losses at its real estate unit. GE Real Estate isn’t required to mark current market value as losses like some competitors in that industry because it originates assets and plans to hold for at least five years, rather than count on profit made by selling the buildings.
Market Value Declines
GE saw its market value decrease to $99.1 billion, falling below Google Inc., owner of the world’s most popular Internet search engine, during the last month. GE is now less than a quarter of its own $431.6 billion value on Oct. 2, 2007.
The company lost 56 percent of its market value last year, trailing the 38 percent decline in the S&P 500 amid the worst economic conditions since the Great Depression. The company now has the ninth-largest weighting in the Standard & Poor’s 500 Index at 1.47 percent, down from the second-largest a year ago, when it made up 2.91 percent.
Moody’s, which began its review in January, typically takes 90 days to complete such an examination, though the analysts at the time said they expect an assessment sooner. GE this week said in its annual filings with the U.S. Securities and Exchange Commission that it isn’t required to post more capital or collateral for its debt if long-term ratings stay at or above Aa3 and AA- at Moody’s and S&P respectively.
To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Rachel Layne in Boston at rlayne@bloomberg.net.
Last Updated: February 20, 2009 18:26 EST |
