GE earns drop on continued finance unit woes, but results still top Wall St. expectations

GE earns drop on continued finance unit woes, but results still top Wall St. expectations
STEPHEN MANNING
Copyright 2009 Associated Press
2:56 PM CDT, April 17, 2009
http://www.chicagotribune.com/business/sns-ap-earns-general-electric,0,4460338.story



FILE - In this Dec. 2, 2008 file photo, a General Electric (GE) sign is seen on display at Western Appliance store in Mountain View, Calif. General Electric Co. said Friday April 17, 2009 its first-quarter earnings fell 36 percent on sharply lower profits at its troubled finance arm, but the results beat Wall Street forecasts in a glimmer of good news for the struggling company.(AP Photo/Paul Sakuma, file) (Paul Sakuma, AP / December 2, 2008)

WASHINGTON (AP) — General Electric Co.'s first-quarter earnings fell 36 percent as profits tumbled at its troubled finance arm, but the results beat Wall Street forecasts in a glimmer of good news for the struggling company.

While GE Capital remains a major drag on the conglomerate's profits, GE's strategy of weathering the economic slowdown by relying on its big industrial businesses appears to be paying off, at least for now.

GE, which has a stake in almost every sector of the economy, from light bulbs and credit cards to windmills, on Friday reported net income of $2.74 billion, or 26 cents per share, after paying preferred dividends. That was down from $4.30 billion, or 43 cents per share, a year earlier.

Earnings from continuing operations, however, surpassed Wall Street expectations of 21 cents per share — coming in at 26 cents. Shares of the Fairfield, Conn.-based company rose 12 cents to close at $12.39 Friday.

While most GE operations struggled, its divisions that make power plant turbines, sell products to the oil and gas industries, and build jet engines managed to turn a profit, helped by servicing of customer equipment rather than new purchases.

But those results couldn't quite compensate for drops in its entertainment, consumer and health care segments, as a deep recession continues to eat into appliance purchases, advertising and hospital budgets.

Jeffrey Immelt, GE's chief executive, said the conglomerate is doing its best to navigate through the recession while trying to limit the damage from factors like GE Capital's growing losses.

"We are operating in this environment the way investors would want us to," Immelt said.

GE believes it won't have to raise new capital to prop up GE Capital, a huge business that finances everything from credit cards to commercial real estate. That unit, which once comprised about half of GE's profits, has worried investors as credit and property markets seized up over the last year, fueling a steep slide in GE's share price.

GE endured some historic setbacks during the first quarter, most caused by GE Capital. In late February, GE slashed its dividend by 68 percent, a move expected to save $9 billion in cash but its first dividend cut since 1938. Two weeks later, GE lost its coveted top 'AAA' credit rating from Standard & Poor's.

The finance arm remains a major concern, even as GE scales back the unit's operations and limits the amount of earnings it expects to generate from the former profit driver. Analysts pointed out Friday that without a big boost from taxes, GE Capital would have posted a quarterly loss of $153 million. With the tax benefit, its earnings slid 58 percent to $1.12 billion.

Hit especially hard was its real estate business, which includes lending and holdings in areas like offices and apartment buildings. The unit posted a $173 million loss in the quarter, versus a $476 million profit a year earlier.

Profits dropped at GE Capital's heavy equipment lending business, and its unit that finances energy projects. The slide in overseas mortgage markets like the United Kingdom and rising defaults on credit cards also led to lower results in GE's consumer lending unit.

The company gave investors an exhaustive review of GE Capital's finances in March, attempting to rebuild confidence following a slide in GE's share price, which is down 24 percent since Jan. 1 and has fallen 62 percent in the past year.

GE warned at the time that its finance arm could just break even this year if the economy worsens.

Analyst Nick Heymann of Sterne Agee said GE Capital still faces major challenges, including a worsening commercial real estate market, more problems as credit card customers face stress from layoffs, and continued problems with mortgage holdings.

"The challenges lie ahead for the most part," he said.

Total quarterly revenue, including a 20-percent drop at GE Capital, fell 9 percent to $38.4 billion, with sales down or flat in every division except GE's energy business. A broad U.S. recession has hurt GE's industrial operations, whose overall sales slipped one percent to $24 billion.

Orders for big-ticket items fell 10 percent to $19 billion during the quarter.

GE said sales from power plant turbines, windmills and other energy work rose 7 percent to $8.24 billion. Sales in GE's aviation business, which makes jet engines, rose 12 percent. The gains came mostly from work refurbishing existing engines and energy equipment as customers spent money to fix rather than buy new products.

Immelt said GE's operations like wind power would likely benefit from stimulus spending in the United States and globally this year. A $3 billion project to build turbines for Iraqi power plants is also expected to show up in profits.

But most segments suffered. Sales slipped 9 percent at GE's healthcare division, with hospitals holding off purchases as endowments drop and uncertainty surrounds health care reimbursement. GE's entertainment division, which includes the NBC television network, posted a 2 percent drop in sales, due to softer advertising markets and weaker DVD sales.