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GE's Earnings Disaster

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Profit drops 45% and revenues lag.

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Amidst all the excitement of companies beating five-times watered down earnings estimates, General Electric (GE) managed to lay an egg. Consider GE Profit Falls 45% as Revenue Trails Estimates:

General Electric Co.'s third-quarter profit declined 45% as the company scaled back real estate and consumer lending and sold fewer medical machines, leading to a steeper drop in sales than analysts projected.

Chief Executive Officer Jeffrey Immelt is shrinking the finance unit and weighing a reduced stake in NBC Universal as he builds energy, transportation, and health-care businesses to help emerge from the recession. The GE Capital plan is ahead of schedule, Immelt said on a conference call after today's earnings report...

Profit from continuing operations declined to $2.45 billion, or $0.22 a share, from $4.48 billion, or $0.45, a year earlier, the company said in a statement. The average profit estimate of 13 analysts in a Bloomberg survey, excluding some items, was $0.20 a share. Results include $0.05 a share of restructuring costs, GE said...

Total orders declined 18%, and equipment and service contract cancellations remain "insignificant," GE said. Large equipment orders in the so-called infrastructure divisions also fell 18% from a year earlier, a slower pace than the second quarter's 44% drop.

The third quarter was likely the low point in orders, Immelt said on the conference call with analysts...

Health-care profit fell 20% as the US market for orders "remains tough," said GE Chief Financial Officer Keith Sherin said on the call...

GE spent $600 million on cost reductions in the quarter, knocking about $0.05 a share off profit. Total year-to-date expenses to cut jobs, shut offices, and consolidate some plants have reached to $1.3 billion, GE said today.

GE Capital, helped by tax credits, had a $997 million loss before taxes, spokeswoman Anne Eisele said. The company's revenue was hurt by a stronger US dollar than in last year's third quarter. The consolidated tax rate was a negative 25%, driven by the GE Capital credits...

Immelt has said he plans to reduce GE Capital's assets to $400 billion to $450 billion, from about $557 billion in the second quarter, by concentrating on mostly commercial lending.

Selling NBC Universal

The company is preparing to cut its stake in NBC Universal in a deal with Comcast Corp. (CMCSA) and may divest the media unit entirely in seven years, according to people familiar with the discussions.

"I don't think NBC strategically fits with his view of GE going forward as sort of the green company," Hardesty said of Immelt.

Not About Raising Cash

General Electric CEO Immelt says the spinoff of NBC Universal entertainment unit is not about raising cash.

...Immelt reaffirmed Friday that a partial sale or spinoff of its NBC Universal entertainment unit is on the table, while saying the company has no need for cash.

Bearish observers of GE believe unrealized losses in GE Capital and expected tougher capital requirements from regulators will mean GE will need to raise a substantial amount of cash at some point, either by issuing equity or through unit sales, or a combination.

GE, a Finance Company

The best way to think of GE is as a finance company masquerading as a manufacturing company. This was essentially the business model of General Motors as well, except GE is better at it.

In reference to the sale of NBC entertainment, Immelt said GE has no need for cash. Of course GE has a need for cash. GE has a total debt of more than $500 billion.

Instead of buying back shares at totally ridiculous prices over the years, GE could have and should have been retiring debt. The panic low earlier this year below $6 was on concerns GE wouldn't be able to refinance that debt.

The good news is that GE has "90% completed its plans" to refinance its debt.

That relieves the short-term problem, but what about the long-term problem of getting rid of all that debt? Look for GE to continue to sell assets just as announced: reducing GE capital and NBC universal.

As that happens, one can expect more layoffs and/or voluntary staff reductions by attrition. There's no driver for jobs anywhere as companies and individuals alike seek to reduce leverage and pay down debt.

No positions in stocks mentioned.
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