No longer bringing good things to light, General Electric (GE) is battening down the hatches. In the midst of the biggest financial crisis to hit the United States economy since the Great Depression, one of our largest entities is throwing in the towel in the short term in hopes of riding out the storm in the long run.
Yesterday, GE announced that it would be reducing guidance for the third quarter and full year 2008. In addition the company immediately suspended its stock buyback program in an effort to strengthen its balance sheet. The company now expects earnings of $.43 to $.48 down from a previous range of $.50 to $.54. For the full year profits are expected to be between $1.95 and $2.10 versus a prior forecast of $2.20 to $2.30 per share.
Although the company has been weathering the financial storm better than others (see, “Avoid Devon Energy (DVN) Like The Plague“), the company intends to reduce its financial services business as a percentage of overall revenues. The company does not expect to need any additional debt going forward and they are reducing commercial paper needs to 10-15% of the financial services unit total debt exposure. That seems to be a wise move given that credit markets are so out of whack. It’s expensive to issue debt and pulling back on your needs in that market makes a ton of sense. This announcement is a classic move by a very large company facing an unprecedented crisis. They are clearly pulling back on more aggressive plans. Typically with such a pull-back earnings suffer.
Forget about growth in such an environment. These moves are all about survival.
And have you seen former GE CEO, Jack Welch on the interview circuit during this crisis? He’s running around talking about a deep recession for the first quarter of 2009. He’s so frightened of the credit mess, he is forsaking years of conservative principles in order to get a bailout deal that may or may not work. It should be no surprise then that his former company is preparing for the worst. It makes sense. If the odds of receiving a worthy return for taking risk drops precipitously there is no reason to venture.
Ah, but that is the rub. Nothing ventured and nothing gained. Get it?
The early traders seemed to get it sending GE shares down more than 5% in the pre-market trade, but then irrationality set in and buyers emerged to push GE to a gain for the day (as of this writing). The reason for the move appeared to be in the affirmation of its ratings by Standard & Poor’s. Wait, that’s not the same Standard & Poor’s that rated derivative securities AAA when in fact the payment stream was far from guaranteed?
Hmmm, that’s a great reason to buy a stock now isn’t it? What a crock! Don’t get suckered into the enthusiasm on very bad news (see, “A Healthy Dose of Reality“). A disturbing trend is emerging with GE. For years the company was a stalwart at meeting or exceeding expectations. An earnings guidance revision is not a miss, but it is darn close. GE is a good company no doubt, but the trend here is negative. I would be very careful before betting against that trend especially as this economic storm worsens before it gets better.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
