By Edmond Lococo and Rachel Layne
March 20 (Bloomberg) -- General Electric Co.’s six-hour review of its finance arm provided what investors called a “more sober” assessment of its earnings power during a global recession and credit crunch.
GE backed its $5 billion target for GE Capital while saying earnings would be closer to $2.5 billion if this month’s economic conditions prevail for the full year. GE Capital would at least break even and wouldn’t need more outside funding even under the most dire of three scenarios tested, executives told shareholders in New York yesterday.
“It’s more sober, which many investors were looking for,” Peter Klein, senior portfolio manager at Cleveland-based Fifth Third Asset Management, said in an interview. “The earnings power of this division will be challenged. The market has to get its arms around what you pay for that.”
Chief Financial Officer Keith Sherin and Michael Neal, GE Capital’s chief executive officer, led investors through the most detailed review yet in an attempt to restore confidence. GE shares dropped 72 percent in a year on concern about the unit’s funding, reserves and potential writedowns and losses in the deepest economic crisis since the Great Depression.
GE Capital said it still has a net income target of $5 billion year if the U.S. economy shrinks 1.8 percent. Earnings would be $2 billion to $2.5 billion under a Federal Reserve “base case” scenario used to test banks or zero under an “adverse” case that assumes a 3.3 percent drop in U.S. gross domestic product and unemployment peaking above 10 percent.
“The world has gotten worse -- you know that, I know that,” Neal told the investors. “We think as we go through it that the economy operating in March is closer to the Fed base case.”
The finance arm includes credit cards, real estate, plane leasing and corporate lending.
Market Reaction
The shares fell 19 cents, or 1.8 percent, to $10.13 yesterday in New York Stock Exchange composite trading. GE shares dropped about 60 percent since September through yesterday as investors burned by bank failures punished even finance companies tied to profitable industrial businesses.
The global credit crunch already cost GE its top AAA credit rating from Standard & Poor’s and prompted the Fairfield, Connecticut-based company to cut its dividend for the first time since 1938.
Those setbacks, after Chief Executive Officer Jeffrey Immelt said in December he was committed to keeping both, made Jim Bitter, a Wilmington, Delaware-based analyst at Wilmington Trust Co., more skeptical of yesterday’s presentation. The firm owned more than 8 million GE shares at the end of December.
“Unfortunately we keep finding out after the fact that there are things we weren’t told by GE or their assumptions were on the optimistic side,” Bitter said.
GE Forecasts
Immelt, 53, stopped providing per-share earnings forecasts this year after twice missing his predictions in 2008.
“You say this is the operating plan; you don’t stick with that” as conditions worsen, CFO Sherin said. “We’re trying to operate as effectively as we can in the environment we see today.”
GE Capital, the world’s largest non-bank finance company with consolidated assets of $637 billion, accounted for $8.6 billion of the parent’s $18.1 billion profit from continuing operations last year. Immelt has said he wants the division to contribute about 30 percent of annual profit.
Standard & Poor’s lowered GE and GE Capital’s top-tier rating one level to AA+ last week with a “stable” outlook. GE Capital may post little or no profit or possibly a “modest net loss” this year and next, the service said in its report.
Ratings Services
S&P likely already incorporated GE’s worst-case scenario in its ratings, said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York. That suggests “S&P should have a pretty stable ‘stable’ outlook, which should give bondholders incremental comfort,” he said.
Moody’s Investors Service, which said in January it was reviewing GE for a potential downgrade, has yet to complete its assessment.
GE Capital has adequate funding and isn’t likely to need for additional outside capital, Sherin and Neal said. In October, GE sold $3 billion in preferred shares to billionaire Warren Buffett’s Berkshire Hathaway Inc. and $12 billion in common shares to bolster the balance sheet.
GE Capital said it has total funding sources of about $92 billion this year and $60 billion to $80 billion for 2010 as it shrinks the portfolio.
Debt issuance and reduction of commercial paper balances will leave the company with $38 billion in cash this year and $31 billion to $41 billion in cash in 2010, giving the division resources for unexpected events, GE Treasurer Kathryn Cassidy told investors.
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