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Issues and Insights: Investor Communications in Turbulent Times-General Electric's Disappointing April 11th Earnings Release
Background on GE's 1st quarter earnings communications:
On April 11th, General Electric (NYSE-GE) stock plunged 13% to $32.05 as investors reacted to an unexpected quarterly loss and a big cut in the company's annual earnings forecast. The stock decline was the worst for GE since the 1987 stock market crash. About $47 billion in market value was erased.
"We hate disappointing investors. It's not part of the company. It's not part of the culture. We take accountability for that." (General Electric CEO, Jeff Immelt)
- GE blamed the financial market crisis for its surprising poor performance.
- However, GE's healthcare business and industrial businesses did not perform well either. The only strong performer was GE's infrastructure business.
- The overall stock market was not happy with GE's bad news. Partly in response, the Dow Jones Industrial Average plunged 256 points or about 2 percent.
- GE is widely seen as a bellwether for the economy because of its wide-ranging operations. The New York Times noted "The inability of GE to sidestep current market forces underscores just how broadly the credit crisis is spreading through the economy."
- Making matters worse, GE's CEO Jeff Immelt had reassured the market in mid-March that GE would make its earnings forecast. (GE has had a long history of meeting earnings expectations).
- Brokerage analysts at a number of major Wall Street firms cut their ratings on GE shares.
- Investors were also stunned because Immelt had built a GE that was expected to withstand economic weakness and market volatility.
- As a big multinational conglomerate with businesses in a number of different sectors, investors thought weak performance in certain businesses would be countered by good performance in other businesses.
- Immelt had sold economically sensitive businesses and invested in higher return businesses in areas such as health care and power plant equipment.
- GE had a supposed barrier to U.S. economic weakness, and actually benefited from a weak dollar, since more than half of its revenues are from outside the United States.
GE, and its CEO Immelt, now face pressure to not only improve results but also explain why GE's mix of businesses still makes sense. Investors have long wondered, for example, whether NBC Universal belongs in General Electric's portfolio of businesses and have pressured GE to reduce its exposure to financial services.
- Citigroup: "GE will have to reestablish investor credibility and earnings consistency before valuation can move higher."
- Credit Suisse: "...the magnitude of the miss coupled with weakness across the board begs the question - is the company simply too big to manage?"
- Morgan Stanley: "It seems like something's broken here."
- Deutsche Bank: "GE has become a classic show-me story.
How would we advise our clients in a similar situation? What could GE have done better?
- Rule of thumb: If earnings are going to be 10 percent lower than analysts expect, companies should put out a warning. General Electric claims that conditions deteriorated very quickly at the end of the quarter. Given that GE reports its earnings soon after the end of each quarter, GE did not have a great deal of time to warn investors about the shortfall. Despite GE's explanations, the company should re-examine its earnings guidance policies and procedures to avoid such a surprising earnings report and forecast in the future.
- Given financial market volatility and widespread recession fears, why was Immelt so publicly confident in his forecasts for so long? In December 2007, he said the company's 2008 forecast was "in the bag" and he reiterated it on March 13th. Jack Welch, GE's iconic former CEO, said, "Here's the screw-up: You made a promise that you'd deliver this, and you missed three weeks later."
- GE needs to try to restore lost credibility and answer investor concerns about GE's strategy and ability to forecast earnings. Investors also want to know: Is GE still a safe investment?
- Immelt should meet with GE's 10 biggest investors and explain exactly what happened, why it happened and why it shouldn't happen again. He should state why GE's mix of businesses still fits and makes sense.
- GE should discuss initiatives that it is using to cope with the credit crisis/financial market volatility.
- The company, and especially Immelt, should conduct more media interviews, recognizing that these issues will continually be asked either directly or indirectly.
Sources: The Wall Street Journal, Bloomberg News, The New York Times
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