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GE Taking Special-Purpose Entities to the Masses

Investors are hoping to get a deeper look into the increasingly mysterious workings of General Electric (GE) on Thursday as the company hosts its first-ever quarterly conference call.

"We expect GE to disclose significant additional information to help shareholders better understand the areas and sources of growth within its business," said Nicholas Heymann, an analyst at Prudential Securities.

GE has faced heightened pressure and scrutiny since the collapse of Enron as investors worried that other large and complex companies could be skewing their numbers with questionable accounting. Those fears were exacerbated last month when Pimco fund manager Bill Gross raised concerns about the firm's level of commercial paper and a possible lack of adequate backup lines of credit.

No Alarms

Analysts aren't expecting too many surprises from GE in terms of its revenue and net income Thursday, since the company has already reiterated projections several times.

Thomson Financial/First Call estimates the company will earn 35 cents a share in its first quarter on revenue of $32.7 billion. Last year GE earned 30 cents a share on sales of $30.5 billion.

GE said on March 18 that it expects to meet 2002 earnings guidance of between $1.65 and $1.67 a share, excluding the impact of a goodwill accounting change. It is expected to take a charge of $1 billion, or 10 cents per share, in the quarter as a result of this accounting change.

GE first reaffirmed 2002 estimates in February and said first-quarter numbers should "meet or slightly exceed" consensus estimates of 34 cents a share. In addition, the company has said that it can meet its objectives even if the economy does not cooperate.

Powerhouse

Analysts say the first quarter was likely driven by the same forces that have propelled the business over the past 18 months, specifically, strength in the long-cycle business, which is less economically sensitive.

Of GE's units, Power Systems, medical technology and GE Capital are all expected to have contributed positively to earnings, but analysts say they will be listening out for any signs of a turnaround in the short-cycle business. CEO Jeffrey Immelt has said strength in the plastics operations would signal an impending economic recovery. Still, most analysts say they don't expect to hear that the more cyclical businesses are rebounding yet.

Questions about the sustainability of earnings growth could also be raised in the call Thursday, particularly since one of the firm's strongest units -- Power Systems -- is expected to slow considerably this year because of a sharp decline in its shipments of domestic gas turbines.

In addition, commercial engine aircraft deliveries are seen falling 15% to 20% in 2002, and GE has said it still sees no pickup in advertising at its NBC unit.

Accretion

Investors will also be eager to learn about how much recent acquisitions have contributed to earnings growth. GE spent $11 billion on acquisitions in the first quarter, which are expected to add $7 billion to 2003 revenue and $1.4 billion to next year's operating profits, according to Heymann.

Investors have become increasingly wary of the growth-by-acquisition strategy after Tyco (TYC) was accused of aggressive purchase accounting methods and acquisitions to boost earnings and mask slower organic growth.

In 2001, GE derived about 15% of its earnings growth from acquisitions, Heymann said. Historically, the company has derived about one-third of its growth from acquisitions, one-third from core growth and one-third from productivity and management process enhancements, he noted.

In addition, investors are likely to ask questions about the firm's access to capital in the wake of the recent concerns raised by Bill Gross. GE and GE Capital's AAA debt rating was recently reaffirmed by S&P, and Heymann believes that access to the long-term and short-term debt markets remains strong.

At a recent conference, GE Capital said its $31 billion in backup credit lines for commercial paper should be raised to $50 billion shortly as the firm reduces its short-term debt to between 25% to 30% of total debt, which recently stood at $240 billion. The firm said its backup lines should soon be at least 50% and perhaps closer to 60% of its short-term outstanding commercial paper.

Passing Through

Robert Friedman, an analyst at Standard & Poor's, believes the company has "real quality of earnings issues" and he will be looking to see how many bundled loans the firm sold during the quarter.

"I want to see whether they were bumping up earnings by selling securitizations to their special-purpose entities ," he said.

GE Capital Services expects about $400 million to $500 million in securitization gains in 2002, compared with $800 million in 2001.

Friedman will also be looking closely at any rise in accounts receivable and any increase in the issuance of stock option grants, among other things.

Shares of GE have fallen 8% so far this year and recently traded for $36.41.

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