Investors wonder if GE will be next to fall into stock market's 'black hole'

October 12, 1991|By Ralph Cato | Ralph Cato,Knight-Ridder News Service

NEW YORK -- Will General Electric, one of the largest and most diversified industrial companies in the world, fall into the stock market's next "black hole" when it reports third-quarter earnings early next week?

This week, the stock market's nerves were frayed when Westinghouse Electric Corp., a prominent loser on Monday and Tuesday, closed the week down $3.625, to $18.125, after it announced a loss of $1.48 billion, largely the product of a huge, $1.68 billion pretax charge to shore up its financial-services division, which is suffering from depreciated real-estate assets.

A week earlier, the stock of another high-profile component of the Dow Jones Industrial Average, American Express, had plunged 4 points, to 21 5/8 , on unforeseen problems at its Optima credit-card unit.

The back-to-back carnage in two of the nation's most visible stocks -- both on problems in their credit-related businesses -- has made investors nervous about next week's earnings report from General Electric, which also runs a financial-services business.

Ramifications from Monday's Westinghouse announcement were still reverberating in the stock market by yesterday.

"The size of the Westinghouse writeoff was staggering," remarked strategist Thom R. Brown at Rutherford, Brown & Catherwood in Philadelphia.

"It would appear that Westinghouse decided to 'bite the bullet' and get all its bad news out of the way in the third quarter, but nobody was expecting that big a charge," Mr. Brown stressed.

But a major reason why high-profile, widely followed Westinghouse surprised the market so completely is because "you really needed a credit analyst to see that kind of trouble in financial services coming," Mr. Brown said. The same is true of General Electric, some investors fear.

GE could have other problems as well, bearish analysts attest. The company saw its sales growth slow to only 3 percent during the second quarter of 1990, while per-share earnings growth of 7 percent failed to match the 11 percent growth a year earlier.

Moreover, GE's current dividend yield of 3 percent is considered by some analysts to be too small to support the shares if third-quarter earnings prove disappointing.

Technical traders, too, are watching GE with considerable interest. The stock has progressively fallen since late May, its long decline interrupted by only a few significant rallies.

Moreover, the stock has continued its deterioration recently. It slipped $1.125 to $68.375 for the week that ended Oct. 4, and sank another $1.875 this week.

Last-ditch technical support for GE is around $65 per share, with risk -- in the event of a major market sell-off -- extending all the way back to the November-December 1990 lows near $50 per share.

Some market technicians regard GE as a modern bellwether for the entire Dow average, much as IBM and, before it, General Motors were in former years. If GE breaks below $65, some analysts say, the move could conceivably launch the Dow industrials toward a test of the 2850 level, from its close on Friday at 2983.

From a fundamental viewpoint, the mean expectation for GE third-quarter earnings on Wall Street is for a net of $1.21 per share in a range of $1.18-to-$1.26, according to the most recent survey of Chicago's Zacks Investment Research. The mean estimate has fallen from $1.24 per share in Zacks' Sept. 11 survey.

In the third quarter of 1990, the company reported net of $1.16 per share, up from $1.04 in third-quarter 1979.

By the second quarter of this year, GE earnings were up to $1.30 per share, compared to $1.22 a year earlier.

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