Monday, April 14, 2008

GE Surprised Itself—No Wonder it Disappointed Wall Street

The big news in our Newspaper of Record—the New York Post—is not spiraling gasoline prices (up 5% locally in the last few weeks) at home, or food riots abroad.

No, not even GE’s unprecedented, confidence-shattering earnings miss could move the saga of the Red Sox team jersey buried by a die-hard Red Sox fan and recently unearthed from the cement floor of the new Yankees Stadium, off today's front page.

We are not making that up.

Of course, “die-hard Red Sox fan” in this case may be an unfortunately loaded phrase, what with the fanatical local reaction to a bizarre and silly effort to perpetually jinx the new House That Ruth Built.

But the GE news is the real show-stopper, and it appears to have momentarily jinxed the hoped-for economic turnaround that, so far, keeps receding from the horizon like a mirage.

To grasp the shock with which GE’s news was greeted—the company is, after all, half-finance, so why should anybody have been so greatly surprised is not clear—compare GE CEO Jeff Immelt’s comments on Friday’s earnings call with his sanguine earnings preview less than four weeks earlier, during an interview on CNBC.

Excerpts from both appear courtesy of the indispensable Street Events:

Jeff Immelt, GE Chairman and CEO
March 13, 2008 CNBC

Now, look, the US consumer is in a tougher patch. But that is how we had kind of planned the Company in 2008, is assuming that the US consumer would go through a stressful year. Ultimately the US economy is so big you have to somehow protect yourself from the standpoint that some of it does bleed over into the rest of the world. But we just don't see that right now….

You know, look, I think making the stock price grow in the short term is really about I would say three things. One is, delivering financial results, hitting 10% EPS growth, getting $2.42 a share or greater, which is what we believe and what we're committed to do this year, and what we are on track to do this year.

I think in this environment, that is going to look pretty gosh-darn good.

Jeff Immelt, GE Chairman and CEO
April 11, 2008 Earnings Call

We had planned for an environment that was going to be challenging, but what I would say is kind of late in the quarter, particularly after the Bear Stearns event, 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.

We also saw a slowdown in March in the US healthcare and C&I market, so I think what we did is try to reflect on that, not create excuses about it, but take appropriate actions. We have reviewed all the businesses in the last few weeks. We have made operational adjustments as we approach the year going forward. The Company fundamentals remain strong.

The fact that GE surprised the Street—Wall Street’s Finest get paid to look ahead, but seem frequently unable to shake off an ingrained reliance on company “guidance” for near-term forecasts—is not nearly as significant as the fact that GE surprised itself.

And if GE—a manage-by-numbers company if ever there was one—can be surprised, others will surely follow.

Jeff Matthews
I Am Not Making This Up

© 2008 Not Making This Up LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Jeff: Three questions come to mind when reading GE's first quarter numbers...

A) Why is GE still holding onto NBC Universal? Couldn't they spin off the company and use the cash to reduce their long term debt? The media portfolio doesn't fit their core competencies of industrial and financial products/services.

B) Why doesn't GE "double down" on capital spending in its infastructure unit? Specifically, I'm thinking of its oil & gas, energy and transportation divisions. Their segment profits were well above their revenue growth for the quarter. If their were ever a path for getting back to its core competencies, energy and transportation infastructure is it.

C) I wonder whether future impairments will continue to hamper GE's commercial finance unit, specifically its holdings in commercial real estate?

Just wondering, and my opinions could be wrong!

Nosedive said...

Aarons comments


GE has NO long term debt outside the finance operation. Doesn't need it. Generates plenty of cash.

Selling NBC is for cash to buy-back stock. Nothing more - nothing less.

Frankly I don't think they would get quite enough for NBC. Its an election year - and the out half will have good profits. Media doesn't strike me as overpriced anyway.

Biggest issue with NBC - it is not a fit.

(b). Its full speed ahead in the infrastructure division anyway. If there were profitable capex to do there I assure you they would do it. Its THE reason to own GE. Nothing much else.

(c). The commercial real estate holdings. That looks dumb. Get out and buy back stock.