Business Times - 05 Mar 2009
(WASHINGTON) General Electric (GE) is trying to convince shareholders it can weather the economic storm, but investors keep running for cover.
In a letter to shareholders on Tuesday, chief executive Jeffrey Immelt reminded them that one of the world's largest industrial conglomerates has taken strong steps to protect itself from a recession that is rapidly spreading around the globe and threatening its wide range of businesses, from jet engines to lending.
'GE has enormous and enduring strengths that are underestimated right now,' he wrote.
Shareholders apparently aren't convinced. GE, based in Fairfield, Connecticut, has shrunk its troubled finance unit, lowered its reliance on risky debt and moved to preserve cash by slashing its dividend. Yet the selling continues.
GE shares fell 59 US cents, or 7.7 per cent, to close at US$7.01 on Tuesday after touching a new 52-week low of US$6.85. They have dropped 80 per cent over the past year, trading at levels last seen in 1992.
By contrast, the Dow Jones Industrial Average, of which GE is a component, has fallen about 45 per cent the past year, while the S&P 500 index has shed 47 per cent.
And more problems are likely ahead. Many analysts believe that GE will lose its top 'AAA' credit rating this year because of the woes of its lending arm, GE Capital.
Some shareholders argue there is still too much uncertainty around GE Capital, which makes loans for credit cards, overseas mortgages and commercial projects.
GE is shrinking the unit from about 50 per cent of overall earnings to 30 per cent. But it remains difficult to value the business as the financial crisis rages on, said Peter Sorrentino, senior portfolio manager of Huntington Asset Advisors, which owns 6.4 million GE shares.
'I don't think there is anything GE can do to reverse the psychology on the stock,' he said. 'Investors looking at the stock still don't know where the bottom is for GE Capital.'
'Did we end up with too much exposure in certain areas during the credit bubble?' Mr Immelt asked in the shareholder letter.
'Maybe, a few. Today, I wish we had less exposure to commercial real estate and UK mortgages.'
Analyst Nicholas Heymann of Sterne Agee also cautioned investors to be wary of the long-term health of GE's industrial businesses - which include wind turbines, locomotives, refrigerators, aircraft engines and light bulbs - areas that could be hurt by the sharp deterioration of the global economy.
'The ability to sustain the performance of GE's industrial operations, and limit further erosion of their long-term competitiveness, will also become an increasingly critical component of investors' analysis of GE's future prospects,' he wrote in an investor note on Tuesday.
GE also owns NBC Universal, which includes the NBC television network and a chain of theme parks. That unit is expected to notch lower profits this year.
In Mr Immelt's letter, released with the company's annual report, Mr Immelt accepted responsibility for GE's 'tarnished' reputation as a 'safe and reliable' growth company.
But he wrote that he believes GE's industrial businesses should grow this year - GE has said it expects earnings growth of up to 5 per cent for the segments.
He noted that the 130- year-old company has survived nine recessions and the Great Depression.
And some divisions could thrive in a down market, especially those that may benefit from President Barack Obama's US$787 billion stimulus package. That includes GE's US$7 billion renewable energy unit, which makes solar and wind power equipment.
Still, Mr Immelt said GE is preparing for a difficult economy in 2009.
Recent moves to save cash include last week's dividend cut, deeper than most analysts expected and the first reduction since 1938. The lower payout to investors should save GE about US$9 billion annually.
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