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April 11 (Bloomberg) -- General Electric Co. slumped the most in more than two decades after profit unexpectedly fell and Chief Executive Officer Jeffrey Immelt cut the company's annual forecast just a month after pledging to meet it.
GE declined 13 percent in New York trading, wiping out about $47 billion in market value and sending U.S. and European stock markets lower. Immelt slashed the company's 2008 forecast of $2.42 a share, a goal he said in December was ``in the bag'' and repeated on March 13.
The profit miss shook investors and analysts, who grilled Immelt about GE's ability to shield itself from the crisis in financial markets he blamed for the lower earnings. Analysts at Goldman Sachs Group Inc., Credit Suisse Group, Deutsche Bank AG and Citigroup Inc. cut their ratings on the shares.
``The miss and cut to guidance raises credibility concerns for GE,'' Deane Dray, an analyst at New York-based Goldman, wrote in a report today. ``Disappointments were spread across the GE portfolio, with both industrial and financial businesses well below expectations.''
Profit from continuing operations dropped 12 percent to $4.36 billion, or 44 cents a share, from $4.93 billion, or 48 cents, a year earlier. GE was expected to earn 51 cents a share, the average of 15 analyst estimates in a Bloomberg poll. Revenue rose 8 percent to $42.2 billion, missing GE's forecast of about $44 billion. Including discontinued operations, net income declined 5.8 percent to $4.3 billion, or 43 cents a share.
Bear Impact
Fairfield, Connecticut-based GE's stock dropped $4.70 to $32.05 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest percentage decline since October 1987. The shares had fallen less than 1 percent this year compared with a 7.3 percent decline in the Standard & Poor's 500 index.
Immelt blamed the earnings decline on a seize-up in capital markets that forced GE to write down the value of loans and Chinese securities it held and thwarted some asset sales in the quarter's final two weeks. The situation worsened after the Federal Reserve announced a rescue of Bear Stearns Cos. on March 14, the day after he had confirmed his annual earnings forecast on a Webcast with investors.
The Fed's action created ``a different world'' in financial markets, Immelt said today. GE is trying to sell its U.S. credit card and Japanese consumer finance divisions.
Earnings at the commercial finance unit, which lends to midsized business and invests in real estate, missed GE's own forecast and cut per-share profit by 5 cents in the quarter. The shortfall means annual earnings will now be between $2.20 and $2.30 a share, the company said. Profit at GE's health-care unit also trailed expectations.
Immelt Grilled
Immelt was questioned by investors and analysts on a conference call today about his strategy, GE's ability to forecast earnings and its reputation as a safe investment.
``The pressure is on like it's never been on before for all senior management at GE,'' said Nicholas Heymann, an analyst with Sterne Agee & Leach Inc. ``This is one of the biggest misses that GE's had in quite some time.''
Profit fell short of forecasts in four of six main segments: GE Commercial Finance, GE Healthcare, GE Industrial and NBC Universal. In commercial finance, GE fell short by about $270 million, Chief Financial Officer Keith Sherin said.
``You're shocked'' by such results, Benjamin Pace, chief investment officer of Deutsche Bank Private Wealth Management in New York, told Bloomberg Television.
Why No Warning
Immelt and Sherin said today GE didn't warn investors because they wanted to be sure to first have a clear outlook on the rest of the year. GE reported just 11 days after the end of the quarter.
``We knew we had risks in the middle of March,'' Sherin said in an interview. ``But we also had action plans and activities that if things went our way, we would have been in our guidance. And in the end, not much went our way after the middle of March.''
Analysts at Goldman and Credit Suisse cut GE's rating to ``neutral,'' and Deutsche Bank lowered its rating on the stock to ``hold.'' Fourteen analysts recommend buying the stock, and five suggest holding it, according to Bloomberg data. None recommend selling. Before today, 16 analysts rated the stock ``buy'' and four rated it ``hold.''
Immelt Strategy
Immelt, who became CEO in 2001, has spent his tenure crafting GE so that it wouldn't' be exposed to severe market fluctuations. He sold units with annual revenue of about $50 billion that were involved with economically sensitive areas like plastics and insurance. He protected the AAA credit rating, and at the same time, spent more than $70 billion buying higher- return companies in businesses like power plant equipment, aviation, health care and media.
``We believe that the strategy and the fundamentals remain strong,'' Immelt said.
Immelt said on the GE-owned CNBC television network that ``We hate disappointing investors. It's not part of the company. It's not part of the culture. We take accountability for that.''
GE Commercial Finance was hurt when, as required once a quarter, it marked the value of securities it held on its books. Three areas hurt profit: equities including the value of Chinese securities, specifically a wind energy company whose value fell 45 percent. Another $4 billion in loans GE originates to sell declined in value, as did about $1.5 billion in securitizations for retained interest.
Unit Results
Sales at GE Real Estate, part of the commercial unit, also fell behind because it wasn't able to close on about $900 million in expected transactions, Sherin said.
Finance units may have a profit decline of 5 percent to 10 percent this year and non-financial units will increase 10 percent to 15 percent. That will make profit from continuing operations little-changed to up 5 percent, GE said.
GE Healthcare, the world's biggest maker of medical imaging equipment, had a profit decline of 17 percent, below the predicted 5 percent rise. GE hasn't shipped its OEC X-ray machines from a plant for 20 months as it works to comply with an FDA consent decree. That cost about 1 cent a share, Immelt said.
GE Infrastructure, the largest of the six main segments, has units that focus on oil and gas equipment, jet engines, locomotives, power-turbines, water-treatment and aircraft leasing. Its revenue climbed 23 percent, more than forecast, driving a 17 percent increase in earnings, which matched GE's prediction.
Dollar's Impact
GE, which makes more than half of its revenue outside the U.S., may get a boost from the decline in the dollar, said investors including Joseph Keating, chief investment officer of First American Asset Management in Birmingham, Alabama,
``There's probably a very good buy in here,'' said Keating, whose firm manages $3 billion, including GE shares. ``They have a worldwide franchise in industrial products and with the decline of the dollar, their products are competitive worldwide.''
The cost of protecting bonds of GE, the biggest U.S. corporate borrower, reached the highest in almost two weeks. Credit-default swaps on GE's General Electric Capital Corp. increased 6 basis points to 127 basis points, according to broker Phoenix Partners Group in New York.
Moody's Investor Service reaffirmed GE's debt rating at Aaa with a stable outlook, and Standard & Poor's reiterated its AAA, the highest possible.
``GE will have to reestablish investor credibility and earnings consistency before valuation can move higher,'' wrote Citigroup analyst Jeffrey Sprague, who cut his rating on the stock to ``hold'' from ``buy'' today, in a note to investors. ``GE may have reached the point that its size and complexity have become a hindrance to effective management.''
To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net
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