BOSTON (Reuters) - General Electric Co posted an unexpected 6 percent drop in first-quarter profit on Friday, the biggest shock yet to an American industrial bellwether 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. Weakness at its health care and industrial divisions also weighed down results.
The news sent GE shares down 12.8 percent on the New York Stock Exchange, their sharpest drop in two decades, wiping out about $45 billion of market value and 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 was 44 cents per share, 7 cents below analysts' average forecast of 51 cents, according to Reuters Estimates. GE cut its growth forecast for the year, citing 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. "We experienced an extraordinary disruption in our ability to complete asset sales."
The deterioration followed the near collapse of Bear Stearns Cos Inc last month, he said. Immelt said that financial services was responsible for 5 cents of GE's 7-cent- per-share miss of Wall Street's expectations.
GE shares closed down $4.70 to $32.05 on the New York Stock Exchange. This year they are down about 13.5 percent, about double the Dow Jones Industrial average's decline.
GE was the worst performer on the Dow, responsible for more than 37 points of the index's total 256-point decline. Every component of the Dow, except Wal-Mart Stores Inc, fell.
U.S. corporate bonds spreads also widened on the news and the cost of protecting GE Capital Corp's debt against default rose. Five-year credit default swaps on GECC rose by about 6.5 percent, to 131 basis points. The increase means it costs $131,000 a year to protect $10 million of GE debt, compared with $123,000 on Thursday.
GE reported a net 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 in 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 such as 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 such as electricity-producing turbines. Television and film affiliate 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, a senior analyst at Optique Capital Management.
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.
Goldman Sachs cut its rating on the shares to "neutral" from "buy," saying the surprise profit slip "raises credibility concerns" about GE's forecasts.
Deutsche Bank AG cut GE to "hold" from "buy" on the news.
Citigroup Inc also cut the company's rating to "hold" from "buy," lowered its earnings-per-share outlook for the next three years and slashed its price target to $36 from $45.
"One year ago this month we argued that GE was becoming too complex and should consider streamlining the company," Citi analyst Jeffrey Sprague wrote in a note to clients. "We believe the evidence is mounting that GE is too big and complex to manage effectively."
The GE miss, coming at the start of a flurry of profit reports by top U.S. companies, prompted at least one diversified manufacturer -- Textron Inc -- to put out a statement saying it expects to meet or beat its 2008 forecasts.
George David, chairman of United Technologies Corp, told Reuters he was "quite comfortable" with the diversified manufacturer's outlook as well.
The company cut its full-year profit forecast from continuing earnings to a range of $2.20 to $2.30 per share. It warned 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.
Keith Sherin, chief financial officer of the Fairfield, Connecticut-based company, said profit could be near flat if the U.S. economy weakened further.
"We had to do that to give it a little flexibility based on the fact that we did miss on things that we didn't anticipate so far," Sherin said in a telephone interview.
Additional reporting by Jennifer Coogan, Nick Zieminski, Patrick Fitzgibbons and Chelsea Emery in New York, Jim Finkle in Medford, Mass., Sitaraman Shankar in London and Blaise Robinson in Paris; Editing by Derek Caney and Gerald E. McCormick