General Electric Company (GE) has taken quite the tumble under current CEO Jeffrey Immelt -- down 74% from the $41 it traded at when he took over in September 2001.

But if you had backed up the truck and bought the shares at its 52-week low of $6.66 on March 4, you would be sitting on a 52% gain. And while this morning that hypothetical gain was improving -- GE stock rose by as much as 11% this morning -- it ended up falling over 1.4% as Dow dropped 1.2%. The reason for the temporary rise? An investor conference between 9am and 2pm today (which I discussed last night on Marketplace) disclosing details of its finance unit, GE Capital (GECC).

GECC -- which makes loans for goods ranging from commercial real estate to heavy equipment purchases -- accounted for 33% of GE's operating profit, or $8.6 billion in 2008. Now GE's CFO, Keith Sherin, thinks it will make money in 2009 as well. "We expected GE Capital to be profitable in the first quarter and we expect GE Capital to be profitable in 2009," according to Thomson Reuters. Specifically, Sherin thinks GECC will earn $5 billion -- down 42 percent from 2008.

But that's better than what Standard & Poor's expects. S&P lowered GE and GE Capital's AAA credit rating one level to AA+ last week with a "stable" outlook. S&P thought that GE Capital would post "little or no profit or possibly a 'modest net loss' this year and next."

So who's right -- S&P or GE? The answer depends on many factors -- not the least of which is GE's exposure to commercial mortgage-backed securities (CMBS).

Sherin claims that GECC has $2.9 billion in CMBS in its investment portfolio and $50 billion worth of commercial real-estate loan book in a "senior secured position." But the big unknown that still remains at this writing is just how much GECC will need to write down the value of its CMBS portfolio along with all the other loans in its $637 billion worth of assets.

Another important factor in GECC's earnings forecast is the economic forecast. Its $5 billion estimate was based on U.S. gross domestic product (GDP) falling 1.8% and unemployment rising to 7.7%. But the Federal Reserve's base case scenario projects unemployment between 8.4% and 9.3% and GDP down 2.0% -- in which case GECC would earn between $2.0 billion and $2.5 billion. And If GECC incorporates the Fed's worst case scenario, it expects earnings to be zero.

With GE stock down more than the market averages, it appears that investors have passed a verdict on GECC that it may do better than S&P expects but not much more than they thought before the investor presentation. Moreover, if GECC offers unpleasant surprises later this year after a $5 billion profit forecast, the credibility of management could be shot.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns GE shares.


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