General Electric Co. won’t give a quarterly earnings forecast when it reports 2008 results on Friday, but it can’t stop investors from trying to divine the future.
For GE, last year was a troubling one. The blue chip company, a bellwether of the American economy, watched its stock plunge more than 50 percent as it missed earnings forecasts, saw its top credit rating questioned, and began scaling back its faltering loan and lease business, a longtime driver of profit. In December, the Fairfield, Conn.-based company announced it would no longer forecast quarterly results and declined to give an outlook for 2009.
Those moves have shareholders wondering what’s in store this year.
How long will GE retain its AAA credit rating? It’s a closely protected and rare mark of creditworthiness, but ratings agency Standard & Poor’s says the company has a one-in-three chance of losing it in the next two years. GE watchers are also wondering whether the company can pay its $1.24 dividend this year as the global recession worsens.
“Clearly this is about the most challenging year they have seen in decades,” said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management in New York.
General Electric has stakes in many sectors of the U.S. economy, from aviation to renewable energy. It makes locomotives, jet engines, appliances like refrigerators, light bulbs and turbines. It owns NBC Universal, the parent company of the NBC network, Universal Pictures and the Universal Studios chain of theme parks. GE Capital provides loans for everything from credit cards and mortgages to commercial power plants.
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That breadth exposes GE to many elements of the current recession, which has engulfed sectors like banking and home lending and put a significant dent in consumer spending.
Some analysts have warned that the industrial sectors, which touch GE’s transportation, aviation and energy units, will suffer as demand falls for big and expensive goods and infrastructure projects. However, the company is forecasting up to 5 percent earnings growth for the industrial sector in 2009.
GE Capital has also suffered during a downturn that has pummeled the financial sector and saddled it with bad debts and needing cash. GE estimates that the finance arm that had $655 billion in consolidated assets at the end of September will report $7.2 billion in credit losses in 2008.
GE said last month that it will significantly shrink GE Capital in 2009, reduce the finance unit’s exposure to risky debt and slash jobs at both GE Capital and its industrial divisions. By the end of 2009, GE Capital is projected to contribute only $5 billion to overall earnings, down from a projected $9 billion last year.
Analysts surveyed by Thomson Reuters expect GE to earns 37 cents per share in the fourth quarter and $1.81 for the year, lower results that GE reported for the 2007 fourth-quarter and year.
GE has forecast net income of 36 cents to 42 cents per share in the quarter. For all of 2008, it sees a range of $1.78 to $1.84.
GE has not given any earnings per share guidance for 2009, a change that comes after its stock price was battered last year when the company missed its own forecasts. Company shares closed at $16.20 on Dec. 31 after starting the year at $36.76.
By late Wednesday, they traded at $13.19, near a 52-week low and down 20 percent since the start of the year.
GE Capital’s troubles have cast doubt on the company’s ’AAA’ credit rating, especially after ratings agency Standard & Poor’s reduced the GE’s outlook to negative. A ratings downgrade in the future would mean GE would pay higher interest for borrowing money.
GE has also stuck to a pledge to pay its dividend, even as some analysts call on the company to preserve cash by cutting the payout. GE expects to generate roughly $16 billion in cash in 2009, about $2.5 million more than it needs to pay dividends.
CEO Jeff Immelt told investors last month that he believed the dividend and credit rating were equally important. The company has paid a dividend for more than 100 years and is one of only a small handful of American companies with a ’AAA’ rating.
Some analysts believe GE would be more willing to let the rating fall, especially since it is the rating agencies, not the company, that will make that decision based on how the company performs.
“We view the AAA as more vulnerable,” Nigel Coe, an analyst with Deutsche Bank Securities, wrote in an investor note last week.