GE: First Rain on the Parade
The clouds have been gathering for some time.
Oracle reported a slowdown in growth. JC Penny earnings were bad. So did other retailers including Saks. Circuit City reported lower sales. Nevermind the banks.
One by one, sectors have been turning negative, financials. Auto. Construction. Now retailers. Once the slowdown broke out of the housing sectors, investors are forced to wonder: what sector is next to get hit? Traditionally, IT and consumer non-durables.
GE looks to be the first sign of rain on this parade. GE is a bellwhether stock: it makes industrial products, it makes consumer products, it makes medical devices, and it has a major financing arm.
It's not just that GE announced that earnings would fall and miss expectations. GE swore 1 month ago (March 13th) that all was fine. If a company like GE can have this much bad visibility into the business, then what does that say about other companies?
* EPS dropped from $0.48 last year to $0.44 this year
* EPS expectations were for $0.51, a 15% miss
* Revenue increased 8% to $42B, $2B below GE's own guidance of $44B
The revenue miss and earnings miss are actually worse than they appear because GE does a lot of global business and should be enjoying favorable exchange rates from the weak dollar.
WHAT CAUSED THE MISS
GE is both a manufacturer and a bank. In fact, in 2006, GE was the largest commercial and consumer financial company in the US and it did extend mortgages. GE had amazingly good credit: AAA. this enabled it to borrow on fantastic terms. It could either lend on mortgages and credit cards or underwrite in-house business. This is important for a company involved in billion-dollar deals that are paid for over time.
Now GE is stung like all banks. Except that the damage will cascade if they lose their sterling ratings.
GE is also wounded because their business model is finally exposed: a middling manufacturing company dependent on financing games to show growth.
RESULTS BROKEN OUT
Infrastructure (33% of total business): Up 23%
Financial (33% of total business): Up 7%
NBC (11%): Flat
Healthcare (12%): Flat
Industrial (11%): Flat
Infrastructure = engines and energy (which is where we were with energy and PCP)
Industrial = appliances
In essence, GE is floundering.
* Expect more financial writeoffs and losses
* Expect more delinquencies on loans (delinquency rate shot up 70 basis points)
* Expect more sales slowdowns
OUR TAKEAWAY
Aviation remains strong (PCP)
Energy remains strong (MDR, FWLT, IO, ATW, etc)
Consumer services and goods are hurting
Business visibility is suspect for any company
We are short consumer services and consumer goods.
Oracle reported a slowdown in growth. JC Penny earnings were bad. So did other retailers including Saks. Circuit City reported lower sales. Nevermind the banks.
One by one, sectors have been turning negative, financials. Auto. Construction. Now retailers. Once the slowdown broke out of the housing sectors, investors are forced to wonder: what sector is next to get hit? Traditionally, IT and consumer non-durables.
GE looks to be the first sign of rain on this parade. GE is a bellwhether stock: it makes industrial products, it makes consumer products, it makes medical devices, and it has a major financing arm.
It's not just that GE announced that earnings would fall and miss expectations. GE swore 1 month ago (March 13th) that all was fine. If a company like GE can have this much bad visibility into the business, then what does that say about other companies?
* EPS dropped from $0.48 last year to $0.44 this year
* EPS expectations were for $0.51, a 15% miss
* Revenue increased 8% to $42B, $2B below GE's own guidance of $44B
The revenue miss and earnings miss are actually worse than they appear because GE does a lot of global business and should be enjoying favorable exchange rates from the weak dollar.
WHAT CAUSED THE MISS
GE is both a manufacturer and a bank. In fact, in 2006, GE was the largest commercial and consumer financial company in the US and it did extend mortgages. GE had amazingly good credit: AAA. this enabled it to borrow on fantastic terms. It could either lend on mortgages and credit cards or underwrite in-house business. This is important for a company involved in billion-dollar deals that are paid for over time.
Now GE is stung like all banks. Except that the damage will cascade if they lose their sterling ratings.
GE is also wounded because their business model is finally exposed: a middling manufacturing company dependent on financing games to show growth.
RESULTS BROKEN OUT
Infrastructure (33% of total business): Up 23%
Financial (33% of total business): Up 7%
NBC (11%): Flat
Healthcare (12%): Flat
Industrial (11%): Flat
Infrastructure = engines and energy (which is where we were with energy and PCP)
Industrial = appliances
In essence, GE is floundering.
* Expect more financial writeoffs and losses
* Expect more delinquencies on loans (delinquency rate shot up 70 basis points)
* Expect more sales slowdowns
OUR TAKEAWAY
Aviation remains strong (PCP)
Energy remains strong (MDR, FWLT, IO, ATW, etc)
Consumer services and goods are hurting
Business visibility is suspect for any company
We are short consumer services and consumer goods.
posted by Andrew at
4:40 PM
2 Comments:
I think part of GE financials unexpected loss may be due to loss in equities.For Corporate with huge amount of reserve cash are they allowed to invest that amount in other company stocks ? CNBC being part of GE it’s hard to imagine they are not into buying/selling other company stocks.
I know some Chinese companies do that even though China's securities regulators against that kind of practice. With China market down from the peak 6000 to 3200, surely this will be reflected in the upcoming earnings reports.
I don't believe that GE invests in equities, but I don't know.
The financials hit them in two ways: business dropped and reserves increased.
They did not see ~$800M of mortgage business that they had forecast.
And delinquency rates increased, requiring more loan-loss reserves.
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