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By Jennifer Yousfi
General Electric Co. (GE) shocked the market when it announced a 6% drop in net income for the first quarter of 2008.
Continuing earnings per share for the quarter were down 8% to 44 cents per share, missing the mean of analyst expectations at 51 cents per share. Continuing earnings were down 12% from the same period a year prior to $4.4 billion.
"Demand for our global Infrastructure business remained strong, but our financial services businesses were challenged by a slowing U.S. economy and difficult capital markets," GE Chairman and CEO in a statement. "While we are disappointed with our results, the fundamentals of our businesses are strong."said
As the second-largest domestic company based on market capitalization and the only original Dow Jones Industrial Average Index component that is still included in the index, GE has long been considered a bellwether indicator for the U.S. economy. The unexpectedly weak report shook the markets and lead to a 256.56-point decline in the Dow to close at 12,325.42 on Friday.
GE's financial services division, which makes both consumer and commercial loans, was the biggest drag on earnings with a 20% decline in profit.
"Our primary shortfall was a decline in financial services earnings," Immelt said. "We knew the first quarter was going to be challenging, but the extraordinary disruption in the capital markets in March affected our ability to complete asset sales and resulted in higher mark-to-market losses and impairments."
"Our inability to complete these asset sales and higher mark-to-market losses and impairments impacted earnings by $.05 per share versus plan," he added.
GE also lowered its full-year earnings per share estimate to $2.20 to $2.30, down from the $2.42 annual estimate that Immelt had confirmed as recently as March 13 as part of a Webcast.
When asked about his affirmation of GE's EPS target on a conference call with analysts, Immelt made reference to the U.S. Federal Reserve led bailout of investment bank The Bear Stearns Cos. Inc. (BSC).
"Two days after the Webcast, the Bear Stearns situation took place," Immelt said on the call. "The last two weeks in March were a different world in financial services."
Several analysts downgraded the stock on Friday.
"The miss and cut to guidance raises credibility concerns for GE over the near-term, given that CEO Jeff Immelt had expressed confidence," New York-based Goldman Sachs Group Inc. (GS) analyst Deane Dray wrote in a report, Bloomberg News reported. Goldman downgraded GE shares to "neutral."
Many seemed to take GE's unexpected earnings report as confirmation that the U.S. economy is in recession.
"The quarter was disappointing,"' James Hardesty, president of Hardesty Capital Management in Baltimore, told Bloomberg Television. "It does reflect a rather sharp economic slowdown that seems to be occurring in the U.S."
But not everyone agrees with that assessment.
"Based on its historical performance, we are not so sure that the term bell-weather necessarily applies to [GE] stock," Bespoke Investment Group said in a note to clients on Friday. "Since the turn of the century the S&P 500 is down 8.5%. GE, on the other hand, is down over four times that with a decline of 36.6%."
Furthermore, Bespoke analyzed GE and the S&P 500's performance after "the ten largest one day declines in the stock since 1980."
"While both are positive, GE has typically underperformed the S&P 500 in the following week, month, quarter, and half year."
GE stock dropped $4.70, a 12.79% decline the day of the announcement to close at $32.05.
News and Related Story Links:
- GE Press Release:
GE Reports First Quarter 2008 Net EPS of $.43, down 2%, and Continuing EPS of $.44, down 8%; Revenues of $42.2 billion, up 8%; Orders of $24 billion, up 8%
- Bloomberg News:
GE Says Profit Fell, Citing Finance; Forecast Reduced
General Electric's quarterly net off 6%; outlook cut