GE results tarnish reputation as earnings master

NEW YORK (Reuters) - General Electric Co's (GE.N) poor results on Friday have tarnished the conglomerate's reputation as a master at managing earnings expectations and has sent a chill up the spine of investors, already nervous at the start of the quarterly earnings reporting period.

The company, which has interests in just about every major sector of the global economy, reported first-quarter earnings per share of 44 cents, well below Wall Street expectations of 51 cents and cut its growth forecast for the year.

That would be bad enough at any major company, but given GE's record of matching or beating forecasts it is almost cataclysmic.

For nearly a decade, GE quarterly results have never come in below analysts' average earnings forecast, according to Reuters Estimates. In fact, in 29 of the 36 quarters prior to 2008, the company's quarterly earnings have matched estimates and on the other 7 they have beaten them.

That record has led some GE watchers to suggest the company has often managed its earnings by, for example, finding ways to make up any shortfall in one business by taking a nonrecurring gain in another area.

Its apparent inability to do that this time -- given the credit crisis and the weak U.S. economy -- should be a warning as it shows there was nothing a company of such complexity, with its array of different businesses, could pull out of the hat.

"GE is a huge company and they have a lot of levers they can pull to make sure they meet their earnings," said Ian McCulley, an analyst with Grant's Interest Rate Observer.

He said the miss indicated the company's problems went beyond its financial businesses and was a bad omen for the rest of the results season.

"Analysts expectations are way too high. Many companies are going to disappoint," McCulley added.

The shock results sent the shares of GE, which has infrastructure, health, industrial, media and financial arms, down nearly 13 percent, erasing more than $40 billion of its market value.

"GE is still considered a bellwether and so the fact that they are having difficulties and may not have even realized the depth of it three weeks ago is very disconcerting," said Howard Silverblatt, equity analyst at Standard & Poor's in New York.

"It puts a lot of pressure on next week and the week after when more financials report and more companies."

Jeff Immelt, GE's chairman and chief executive, said on a conference call that, basically, GE could not sell enough assets out of its six business divisions to cover the shortfall.

The corporate giant, whose market capitalization is bigger than Ireland's gross domestic product, has managed the unpredictability of business cycles and order flows in the past by effectively managing its costs and deals flow.

For example, a large company can either cut back on research and development spending, or push it out, to meet earnings expectations. It can also time the purchase or disposal of multiple assets so it impacts quarterly earnings.

"The accounting system is riddled with assumptions and estimates, a lot of which are controlled by the company," said Sanjeev Bhojraj, associate professor of accounting at Cornell University's Johnson School of Business.

"It's all about moving things back and forth -- borrowing and lending. A fundamentally complex company can do this to make sure that they constantly meet expectations, as long as expectations don't go crazy."

Or perhaps in this case, that the credit markets do not go a little crazy.

(Editing by Andre Grenon)