Amid a slew of negative analyst comments and a sharp drop in its share price,
will get a chance Friday to defend itself and try to bolster investor confidence.
GE reports third-quarter earnings on Friday, having affirmed earnings targets last month. Chief Financial Officer Keith Sherin said on Sept. 26 that the company would earn 41 cents in the quarter and $1.65 for the year, in line with analysts' estimates. The quarterly earnings would mark a 17% jump from the year-ago period.
But amid continuing weakness in the firm's cyclical businesses and deterioration in its noncyclical units, analysts say there may be little that GE executives can do to reassure investors.
Several analysts have raised questions about the quality of GE's third-quarter numbers, because the company has said the 41-cent figure includes a one-time gain from the sale of its GXS Internet commerce unit. Absent that item, earnings would come in 3 cents lower, according to Jeff Graff of Victory Capital Management, a large GE shareholder.
"The key issues
during the firm's conference call are going to be the quality of earnings," Graff said. "The other things to look at are the cash flow -- to make sure there is no deterioration, and R&D -- to make sure the company is still spending."
GE is expected to post sequentially flat sales of $33.2 billion. Revenue hit $29.4 billion in the same period a year ago.
Analysts say they don't expect GE to offer any new guidance on 2003 because the company has said it will provide an update on that in early December. But concerns about GE's performance next year have intensified since CFO Sherin warned last month that 2003 looks more challenging that previously expected.
In the last two weeks alone, GE's share price has tumbled more than 16%, wiping out $43.6 billion in market value. Around midday Thursday, GE was down 2 cents, or 0.09%, at $21.98.
The main problem for GE is that its long-cycle businesses, which contributed heavily to the firm's double-digit earnings growth over the last two years, are slowing down, and short-cycle business aren't picking up the slack. For instance, GE's Power Systems unit had been one of the main contributors to earnings over the last two years, but analysts expect this segment to slow down, and recently the performance of the unit has been worse than expected.
Meanwhile, economically sensitive areas such as NBC and the plastics businesses, which had been showing tentative signs of a recovery earlier in the year, now appear to be fading.
"I think it's unlikely that we'll see double-digit growth next year, and we're already seeing analysts' estimates reflect that," Victory Capital Management's Graff said.
In recent weeks, analysts have reduced their 2002 and 2003 profit estimates, citing a combination of factors, including weakness at the company's GE Capital unit.
Morgan Stanley analyst Scott Davis cut his 2003 expectations Wednesday, saying that GE could experience a simultaneous decline in its power systems, aircraft engine, plastics and financial businesses in 2003.
Merrill Lynch, meanwhile, cut its 2003 earnings estimates twice in less than two weeks. Merrill cut them once on Sept. 30, and then again on Thursday, citing concerns about the company's pension liabilities and industrial goodwill amortization, as well as worries about GE Capital. Merrill also said the fourth quarter looks more challenging than the third quarter.
GE's jet engine division said this week that it would cut 1,000 jobs this year and as many as 1,800 additional jobs in 2003, due to a slump in the airline industry.
Merrill Lynch analyst John Inch said orders for gas turbine engines are likely to fall to 50 next year from 260 in 2002. He added that while 2003 is shaping up to be a challenging year for GE, 2004 could be even worse, "as the company faces its greatest 'headwinds.'"
Credit Suisse First Boston and Lehman Brothers also have cut their profit estimates, with Lehman saying that GE's reinsurance unit, ERC, has created "unforeseen problems" for GE Capital. ERC, which was hit hard in the third quarter due to storms in Europe, is expected to lose about $450 million this year.
Still, Prudential Securities analyst Nick Heymann is more optimistic than most about GE's prospects. He noted that GE is planning a major restructuring that will change the product mix of the company and gear it toward growth in a more difficult economy.
"By the time you're finished with this revamp, there won't be a long- and short-cycle game anymore," he said, adding that GE will try to create value by shifting more toward solutions and services and away from manufacturing.
Heymann believes more details about this shift may be released before the end of the year, adding that the fourth quarter could be slightly better than analysts expect. GE is expected to post a fourth-quarter profit of 45 cents a share, compared with 41 cents in the same period last year.