Normally reliable General Electric Co. shocked investors with a nearly 6 percent decline in its first-quarter profit and slashed its earnings forecast for the full year, sending its own shares down 10 percent and the broader market sharply lower on fresh worries about the weakening economy.
GE blamed disruptions in its financial business late in the quarter for its inability to advise Wall Street ahead of time about the deterioration in its earnings. But analysts unaccustomed to being surprised by the industrial, financial and media conglomerate were unnerved by the magnitude and breadth of the decline.
"Bottom-line: Disappointments were spread across the GE portfolio, with both industrial and financial businesses well below expectations," Goldman Sachs analyst Deane M. Dray wrote in a note to investors.
GE's financial services business fell 28 percent, driven by a 21 percent erosion in commercial finance due to lower real estate and other income. Net income fell 6 percent to $4.3 billion, or 43 cents per share, from $4.57 billion, or 44 cents per share, a year ago. Earnings from continuing operations came to $4.4 billion, or 44 cents per share, down 8 percent year-over-year.
That was well below the 51 cents per share expected by analysts surveyed by Thomson Financial for profit from continuing operations. The company itself had forecast a profit of 50 to 53 cents per share.
GE shares fell 11.3 percent, to $32.58 in midday trading. Wall Street's major indexes were all down more than 1 percent after the report from a company that usually avoids surprising investors.
The conglomerate said its strong international exposure - more than half its revenues are generated overseas - helped sustain its balance sheet as the U.S. economy slumps. But GE wasn't able to complete asset sales due to tighter credit markets, and was forced to take hefty impairment charges which hurt earnings per share by 5 cents.
"The industrial earnings were up substantially, really led by infrastructure, which remains strong across the board, but the financial services environment was very difficult and became even more difficult late in the quarter," Chief Executive Jeff Immelt said in a conference call with analysts.
Immelt cited the near-collapse of the Wall Street investment firm Bear Stearns Cos. as a reason for the performance of GE's commercial business. Bear Stearns accepted a buyout offer from JPMorgan Chase & Co.
"We had planned for a difficult environment," he said. "We had planned for an environment that was going to be challenging, but what I would say is kind of late in the quarter, particularly after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments and this was something that we clearly didn't see until the end of the quarter."
Analysts, however, saw weaknesses in the results beyond the hard-hit financial sector.
"The major surprise was that the driver to the downside was not confined to just GE Capital," analyst Nigel Coe at Deutsche Bank Securities Inc. said in an investors note.
During the conference call, analyst Scott Davis of Morgan Stanley questioned GE's strategy.
"I think an earlier question asked are there cultural issues that just prevent you from kind of thinking out of the box of maybe this business model worked 10 years ago, but it's just - you have underperformed in the up cycle and now you are on pace to underperform in the down cycle," he said.
Immelt told David he accepted his point, but defended GE's performance.
"We are into an unprecedented financial cycle and with that, our earnings down 20 percent is better than our peers and we are going to be positioned to deliver on the commitments we have made today going forward in the year," he said. "I think we should continue to drive the strategy that we have got and that is what we are going to do."
GE said its commercial finance and GE Money businesses still earned $2.2 billion in the quarter, in what he characterized as a "trough market." NBC Universal profits grew 3 percent, while health care earnings were hurt by continued regulatory shipping restrictions on surgical supplies.
The company lowered its full-year outlook for earnings from continuing operations to between $2.20 and $2.30 per share, to account for an expected 5 percent to 10 percent decline in financial services profit. For the fiscal second quarter, GE forecast earnings per share of 53 cents to 55 cents.
GE had projected earnings from continuing operations of at least $2.42 a share in 2008. Analysts had predicted earnings from continuing operations of 58 cents for the second quarter and $2.43 for the full year.