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Financial Services Drag Down GE


Strength abroad, weakness at home; conglomerate lowers guidance for 2008.


General Electric (GE), the iconic industrial conglomerate, posted weaker-than-expected earnings for the first quarter and lowered its profit forecast for 2008. Shares were off almost 10% in pre-market trading, dragging down index futures. According to The Wall Street Journal:

  • Net income fell 5.8% from a year ago to $4.3 billion, or $0.43 per share; analysts were looking for $0.51 per share.

  • Revenue grew 7.8% from last year to $42.3 billion, lower than analyst estimates of $43.7 billion.

  • The company lowered its full-year earnings outlook to between $2.20 and $2.30 per share, down from previous a estimate of $2.42.

  • GE saw strong growth in its global infrastructure business; most of the profit shortfall was attributed to losses in its financial services division.

GE's CEO, Jeff 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."

The company's healthcare, industrial and finance businesses all made less money than they did last year. Loss provisions in its financial services unit jumped 42% to $1.3 billion and commercial finance profits fell 20%, despite a 6.7% increase in revenue. One bright spot was a 3% increase in profits in GE's NBC Universal business.

Despite garnering more and more of its income from financial services, GE is still seen as a barometer for global growth. Analysts will be hanging on Immelt's every word on this morning's conference call, listening for clues about the state of the world economy.

After aluminum maker Alcoa (AA) posted lower earnings on weak demand from industrial customers, that global economic picture is bleaker. Like Alcoa, strength in overseas markets was overshadowed by weakness in the U.S. The earnings miss and market reaction thereafter -- which is more important than the news itself -- indicates that analysts are overly optimistic about a recovery in corporate profits.

Losses in the financial sector and slow growth at home will continue to be drag on bottom lines. Unless analysts adjust estimates accordingly, it's going to be a very long earnings season.

Position in GE

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