Will GE be able to allay investors' concerns?
Mar 18th 2009 4:00PM
Updated Dec 3rd 2009 3:23PM
In its analyst meeting, GE will try to explain everything on its balance sheet, hoping better transparency will restore investors confidence. Investors have been mostly worried about losses on investments and bad loans at its commercial real estate, U.S. credit cards, and U.K. residential real estate, as well as GE Capital's cash levels. They will want details on its assets and estimated losses. But GE Capital won't be easy to explain, with its complex web of $637 billion in assets. This is what analysts hope GE will address tomorrow:
GE Capital's real estate portfolio -- commercial and residential -- will be in focus at the analyst meeting. The real estate portfolio is worth an estimated $144 billion, $60 billion of which outside the United States. It will likely be hit hard from ill-timed investments in European real estate markets, just when prices were peaking between 2005-2008.
GE executives have said that, under accounting rules, the company doesn't have to "mark to market" its real estate holdings because properties are long-term investments and it only needs to adjust to a cash flow drop, which it claims it has no problem doing. Also, about 80 percent of its real estate holdings have no mortgages, so again, its situation is different from similar, but highly leveraged companies. Analysts are not entirely sold on that idea, and they also think the company's portfolio may lose a lot more than $500 million.
GE Capital's Achilles heel may be its consumer lending unit, according to Bloomberg. GE Money is currently the largest issuer of store credit cards and the second largest of gasoline credit cards, and owns or manages about $32 billion of U.S. private- label credit card debt in about 49 million accounts. GE tried to sell the credit card business, but couldn't get the price it wanted. GE Money's $60 billion mortgage business is also suffering.
GE also has a $190 billion portfolio of corporate loans and leases. These will need to be addressed.
Analysts will want to know whether the industrial units of the conglomerate could inject more money into GE Capital should it need it.
Finally, GE's earnings. Will GE's $5 billion earnings forecast for the unit hold up this year given all the losses? Some analysts believe GE will reduce its earnings forecast for GE Capital and expect it to be around $3 billion.
All will hinge on whether GE execs can gain back investors' trust. CFO Sherin said that the company is in an "incredibly strong liquidity position." that includes $45 billion in cash. He asserts that GE Capital will be profitable in the first quarter and that speculation about it is overdone. However, investors will be looking for clarity and assurance, and anything less would be risky.
GE shares have been on a steady decline since October 2007, dropping from around $41 all the way to $5.73 recently. The company's recent dividend cut didn't help the stock price, obviously. However, since its credit rating was downgraded last week only by one notch to AA+, GE shares have been soaring, nearly doubling to today's over $10 a share price. Some investors may feel like they have missed an opportunity in this recent rally, but it may be more prudent to wait until things regarding GE Capital are clearer.