BOSTON (Reuters) - When General Electric Co (GE.N) held its first-ever briefing for individual investors in March, Jeff Immelt said that even with the U.S. economy “gosh-darn close” to recession, he saw no reason to back down from predictions of 10 percent profit growth this year.
So when the second-largest U.S. company by market capitalization told Wall Street on Friday that first-quarter profit had fallen 14 percent short of analysts’ forecasts, it shook investors’ trust in the company.
Immelt, GE’s chairman and chief executive, blamed most of the shortfall on turmoil in the credit markets following the near-collapse of Bear Stearns Cos BSC.N.
“We experienced an extraordinary disruption in our ability to complete asset sales,” he said on a conference call with investors. “This was something that we clearly didn’t see until the end of the quarter.”
The Bear Stearns situation was unprecedented enough to prompt the U.S. Federal Reserve to help organize a deal in which JPMorgan Chase (JPM.N) acquired the investment bank to prevent its collapse. But investors said they still feel burned by GE’s sudden change in tone, which helped wipe more than $40 billion off its market value on Friday.
“I’m never comfortable with a company talking about, ‘Gosh, today we know one thing and two weeks later we know something else,’” said Eric Schoenstein, principal, at Jensen Investment Management in Portland, Oregon, which manages about $3 billion in assets and holds GE shares. “But on the other hand I do think there was an unprecedented set of circumstances that I think does carry some validity.”
Goldman Sachs, one of at least three major investment banks to cut ratings on GE following the news, took a blunter tone.
“We believe the miss and cut to guidance raises credibility concerns for GE over the near-term, given that CEO Jeff Immelt had expressed confidence and reaffirmed guidance and operating targets on his March 13 retail webcast,” wrote analyst Deane Dray in a note to clients.
GE executives, who faced a withering round of questions in a conference call with investors about the unexpected drop in profitability, took a subdued tone as they reduced their profit forecast for the year to flat to up 5 percent, less than half prior forecast of “at least” 10 percent growth.
“We’re sitting here with a miss in the first quarter and ... we’ve got to be a little bit careful about what we are forecasting,” said Chief Financial Officer Keith Sherin, in an interview with Reuters.
Asked whether he expected market volatility to take a similar toll on the Fairfield, Connecticut-based company’s results in the second quarter, Sherin responded: “We’re trying to be realistic. We’re trying to incorporate everything we learned from the first quarter but we’re not going to put any guarantees on things today.”
Some investors have grumbled for years that GE should spin off or sell its hefty financial operations — which accounted for more than a third of the company’s $42 billion in quarterly revenue. Sherin said that while GE is looking to fine-tune its financial portfolio, a total spin-off is not being considered.
Peter Klein, senior portfolio manager at Fifth Third Asset Management, of Cleveland, Ohio, which oversees about $20 billion in assets and holds GE shares, said the current turmoil in the financial sector make the discussion academic since it would difficult to find a buyer for such a large operation.
“In a market like this, you just can’t say that,” he said. “You’re walking into a buzz saw.”
Still, he said the earnings miss is unlikely to improve investors’ feelings about shares which have shown little long-term movement over the past few years.
“GE is the kind of company that everybody was looking to not miss, so the benefit of the doubt has been taken away,” Klein said. “It was a lead-me story and now it’s a show-me story.”
Editing by Tim Dobbyn