GE's Results Fuel Worries About Credit, Recession

General Electric posted an unexpected 6 percent drop in first-quarter profit, the biggest shock yet to American industry from the credit crisis and the latest sign the U.S. economy may be in a recession.

The second-largest U.S. company by market capitalization said profit fell about 20 percent at its financial services arms, which accounted for more than a third of GE's total revenue in the quarter.

But weakness in health care and industrial divisions also weighed on results.

The news sent GE shares down more than 11 percent in early trade on the New York Stock Exchange, the sharpest drop in two decades, dragging down global markets.

"It's confirmation that we're in a recession," said Jerome Heppelmann, portfolio manager at Liberty Ridge Capital in Berwyn, Pennsylvania.

Profit from continuing operations totaled 44 cents per share, 7 cents below analysts' average forecast of 51 cents, according to Reuters Estimates.

The company said also lowered its earnings forecast for the year, reflecting a slower economy and challenging capital markets.

"The financial services environment was very difficult and became even more difficult late in the quarter," said Jeff Immelt, chairman and chief executive, on a conference call with analysts and investors.

He said the financial services environment deteriorated sharply in the wake of the near collapse of Bear Stearns Cos last month.

"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," Immelt said, adding that financial services was responsible for 5 cents of the company's 7-cent-per-share miss of Wall Street's expectations.

"These results confirm that the slowdown is widespread and beginning to impact capex (capital expenditures) and longer-cycle businesses," said Stephen Surpless, senior analyst at Cantor Fitzgerald in London.

"While the credit crisis might be nearer to the end than the beginning, according to some, the impact on the real economy is taking place and is unlikely to abate in 2008," he added.

So far this year, GE shares are down about 12 percent, more than double the decline of the Dow Jones industrial average.

GE, which also has media and finance arms, reported a profit of $4.3 billion, or 43 cents per diluted share, compared with $4.57 billion, or 44 cents, a year earlier. Revenue rose 7.8 percent to $42.24 billion.

The sharpest drop in segment profit came at the conglomerate's financial divisions, with commercial finance down 20 percent and GE Money consumer finance down 19 percent.

GE's finance arms make commercial and consumer loans, including financing purchases by corporations and individuals.

Profit at GE's industrial unit, which makes things like lighting and appliances, fell 16 percent and health care was down 16 percent.

Those declines overshadowed a 17 percent rise in profit at the infrastructure unit, which has been boosted by emerging-market demand for heavy equipment like electricity-producing turbines.

NBC Universal's profit rose 3 percent, though that was far short of expectations.

"I thought they'd be doing better on the industrial and infrastructure side of things, thought that (would) have been enough to get over the hump," said Mike Gandrud, senior analyst at Optique Capital Management.- Goldman Sachs cuts its rating on the shares to "neutral" from "buy" on the news.

The company cut its full-year profit forecast from continuing earnings to a range of $2.20 to $2.30 per share.

It warned that it foresees profit declines in the second quarter and through the full year at its financial services arms.

The new full-year earnings forecast, which calls for profit to be flat to up 5 percent, compares with an earlier view of "at least" 10 percent.

Many on Wall Street had viewed that as a conservative forecast.

Revenue in the United States fell 5 percent in the quarter, with the pain stretching from the finance arms into the consumer-oriented appliance business, he said.

Outside the United States, revenue was up 22 percent, Immelt said.

"We felt like it was wise to revise guidance for the remainder of 2008 to reflect today's market realities," Immelt said.

"We are really assuming no improvement during the year."

General Electric posted an unexpected 6 percent drop in first-quarter profit, as the slumping U.S. economy and credit crunch drove down profits at its financial, industrial and health care units.

Shares of the second-largest U.S. company by market capitalization fell almost 10 percent, dragging down global markets.

Due to the size and variety of its operations, GE  is regarded as a bellwether of the U.S. economy.

"It's confirmation that we're in a recession," said Jerome Heppelmann, portfolio manager at Liberty Ridge Capital in Berwyn, Pennsylvania.

The company also lowered its earnings forecast for the year, reflecting a slower economy and challenging capital markets.

The company, which is the parent of CNBC and CNBC.com, also lowered its earnings forecast for the year, reflecting a slower economy and challenging capital markets.

"These results confirm that the slowdown is widespread and beginning to impact capex (capital expenditures) and longer-cycle businesses," said Stephen Surpless, senior analyst at Cantor Fitzgerald in London.

"While the credit crisis might be nearer to the end than the beginning, according to some, the impact on the real economy is taking place and is unlikely to abate in 2008," he added.

By the Numbers

GE, which also has media and finance arms, reported a profit of $4.3 billion, or 43 cents per diluted share, compared with $4.57 billion, or 44 cents, a year earlier.

Revenue rose 7.8 percent to $42.24 billion.

Profit from continuing operations totaled 44 cents per share compared with analysts' average forecast of 51 cents, according to Reuters Estimates.

The sharpest drop in segment profit came at the conglomerate's financial divisions, with commercial finance down 20 percent and GE Money consumer finance down 19 percent.

Profit at GE's industrial unit, which makes things like lighting and appliances, fell 16 percent and health care was down 16 percent.

Those declines overshadowed a 17 percent rise in profit at the infrastructure unit, which has been boosted by emerging-market demand for heavy equipment like electricity-producing turbines.

NBC Universal's profit rose 3 percent.

"I thought they'd be doing better on the industrial and infrastructure side of things, thought that (would) have been enough to get over the hump," said Mike Gandrud, senior analyst at Optique Capital Management.

'Difficult' Two Weeks

GE Chairman and Chief Executive Jeff Immelt said 5 cents of the earnings-per-share decline could be attributed to the financial services units, where business slowed down abruptly in the wake of the near collapse of Bear Stearns last month.

"The commercial finance business, which has really been one of our best businesses in the company, had a very difficult last two weeks, particularly after the Bear Stearns saga," Immelt said in an interview on CNBC television.

CNBC is part of GE's NBC Universal unit.

The company cut its full-year profit forecast from continuing earnings to a range of $2.20 to $2.30 per share.

The new full-year earnings forecast, which calls for profit to be flat to up 5 percent, compares with an earlier view of "at least" 10 percent.

Many on Wall Street had viewed that as a conservative forecast.

"We thought we came into the year on a conservative basis," Immelt said.

"Obviously, we weren't conservative enough." Revenue in the United States fell 5 percent in the quarter, with the pain stretching from the finance arms into the consumer-oriented appliance business, he said.

Outside the United States, revenue was up 22 percent, Immelt said.

"Outside the United States, we're just not seeing a slowdown yet," he said.

"I don't think we can assume that everything grows to the sky forever ... but the global markets remain robust."

GE shares were trading at $33.10 in premarket trading, down from a $36.75 close on the New York Stock Exchange.

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