GE's Industrial Operations In Focus As Co Navigates Downturn
April 09 2009 - 2:13PM
Dow Jones News
General Electric Co. (GE) executives will have little margin for
error when they provide the outlook for the company's wide-ranging
industrial units alongside first-quarter earnings on April 17.
It has been a year since the U.S. conglomerate shocked investors
by missing profit expectations following a meltdown in its GE
Capital finance unit during the last weeks of March 2008.
With GE Capital undergoing radical surgery since then through
shrinkage and a new funding model, GE Chief Executive Jeff Immelt
aims to leverage operations ranging from aircraft engines to
washing machines, oil and gas infrastructure, and media content to
steer the company out of trouble.
Immelt is relying on the industrial units for nearly $16 billion
in cash flow - and earnings growth of zero to 5% - to provide
investors some relief in a year in which GE Capital is forecast to
break even at best.
But the pressure on such targets, last affirmed in February, is
intensifying amid weak outlooks from rivals with similar
customers.
"We're a bit concerned that there could be (order) cancellations
(and) that those really haven't been well-anticipated yet," said
Tim Ghriskey, chief investment officer of Solaris Asset Management,
which owns a GE stake.
Ghriskey and others remain optimistic GE's revenue from
maintenance and related services on products it already has sold
can help it offset declining new-order rates and potential
big-ticket cancellations. GE has said it expects services to
account for up to 75% of industrial revenue this year, compared
with 65% in 2007.
It also has forecast that its GE Capital finance arm will be
able to eke out a meager first-quarter profit and break even for
the full year even under "worst-case" economic conditions. But
analysts are skeptical.
"It seems like we're headed for that worst case," Edward Jones
analyst Matt Collins said. "That leaves you with what (GE) can do
with industrial."
In GE's last companywide update, Chief Financial Officer Keith
Sherin told investors in February that several of its big
infrastructure divisions had solid momentum heading into 2009.
In particular, he cited the energy infrastructure unit, which
produces power-generation gear, describing it as likely "the
strength of GE" in 2009. Sherin said at the time that falling oil
prices could lead to some project delays or cancellations, but he
added that maintenance and other services, and a strong order
backlog, would more than make up for it.
The company also predicted profit growth in its technology
infrastructure division, although it has made clear the poor
economy will mute some of the gains. The division includes GE's
aviation, health-care and transportation units.
Profit will be flat to down slightly at GE's NBC Universal media
unit this year, GE has said, with Sherin noting in February that
conditions remain "really tough" for media in general. Still, the
company has said margins should benefit compared with 2008 because
of the lack of the Beijing Olympics, which GE sponsored and NBC
aired.
Regardless, some analysts say GE's industrial and nonfinance
businesses appear to be holding up relatively well, at least within
the context of the downturn.
"Nobody is immune from the global recession under way," said
Collins, of Edward Jones. But "the good news is that GE has one of
the best global infrastructure and energy-efficiency portfolios out
there, and that bodes well for long-term growth."
Collins expects GE's industrial divisions to generate about $3.3
billion in first-quarter operating profit, buoyed in a big way by
maintenance and other services. He said the figure is down about
12% from the year-ago period but still on track to be better than
what he forecasts will be a 30% to 40% drop in earnings for the
industrial sector as a whole this year.
Peter Klein, a portfolio manager at Fifth Third Asset Management
Inc., said the tone of GE's discussions regarding its industrial
businesses could turn out to be as important as the actual results
when GE issues its first-quarter report.
"Realistically, there are pressures out there, so we expect
there to be a slowdown" in the industrial units, said Klein, whose
firm owns 4.8 million GE shares. But "you want to make sure that
the tenor of the business outlook is not becoming more
negative."
Conversely, he added, "there has been so much discounted in GE
stock at this point that anything even slightly positive could act
as a little bit of a springboard" for the shares.
GE shares were recently at $11.53, up 8.4% on the day. The
52-week range is $5.73 to $37.07.
-By Bob Sechler, Dow Jones Newswires; 512-394-0285;
bob.sechler@dowjones.com