GE stockholders anxious about disclosure

They want to be satisfied `Enron issues' don't lurk, one analyst explains

April 11, 2002|By BLOOMBERG NEWS

FAIRFIELD, Conn. - General Electric Co. Chief Executive Officer Jeffrey Immelt says the world's largest company by market value is improving its disclosure of financial information. But investors are demanding more.

"People want to be satisfied that there are no Enron issues within GE," said Clay Hoes, an analyst at Minneapolis-based American Express Financial Advisors, which owns more than 50 million GE shares.

Immelt has pledged since December to provide more insight on how GE keeps earnings rising even during a recession and as sales declined. The company more than doubled the amount of sales and revenue information provided on its main industrial and finance units in its annual report last month.

The company, which will hold its first earnings conference call today, has said that revenue from service contracts, which have higher profit margins than other products, and cost cutting have helped it keep profit rising during the recession.

Nevertheless, its shares have dropped 6.2 percent since Immelt succeeded Jack Welch in September. The company is expected to say today that its first-quarter profit, before a required accounting change, rose by about 17 percent, or to 35 cents a share.

GE's net income likely dropped.

In the aftermath of the collapse of Enron Corp., investors have been asking more questions about how GE has achieved more than 100 consecutive quarters of profit increases. Pacific Investment Management Co.'s Bill Gross also raised concern that GE relies too heavily on short-term financing and acquisitions to produce growth.

"I'm unwilling to just take it as an article of faith," said Brian James, an analyst at Loomis Sayles & Co. in Boston, which owns GE shares. "I'd like to see more color from Immelt, particularly on acquisitions."

Immelt, following in Welch's footsteps, has said he is considering acquisitions with total revenue of about $100 billion to keep profit rising. In February, the company said its first-quarter sales probably rose at least 3 percent after falling three straight quarters. He's promised to give investors what they want.

"Investors are going to see what they need to see, and if they need to see more, they will see more," Immelt said in January.

In the past, investors rewarded GE for the predictability of earnings gains at the maker of aircraft engines and light bulbs, parent of NBC broadcasting and the GE Capital financing business. That hasn't been the case this year.

The Dow Jones industrial average has gained 8.1 percent and the Standard & Poor's 500 index rose 4.1 percent since Immelt assumed the job. GE's shares rose 75 cents yesterday to $37.20.

"Most industrial [companies] are priced as if a near-textbook recovery will take place," said Win Murray, an analyst at Columbia Management Group, which owns GE shares. "GE stock, after lagging the market for two years, is relatively attractive." Investors say they want more detail on how much profit in large units, such as GE Capital and Power Systems, comes from purchases. GE hasn't detailed those figures in the past.

About 15 percent of GE's total profit came from purchases last year.

The company expects to gain about $7 billion in sales and $1.4 billion in operating profit in 2003 through acquisitions of industrial companies that have closed or were agreed upon in 2001 or this year.

Some critics have said GE manipulates the timing of gains and losses at GE Capital, which accounts for about 40 percent of its profit, to keep earnings steady.

The company has long disputed the allegations. To help address the concern, GE plans to release information today about its balance sheet, which contains details on assets and liabilities, to give investors better insight into the company's financial makeup.

GE already has said it will sell about $25 billion of notes and bonds this quarter to lessen its dependence on short-term financing and increase its backup lines of credit. It sold $11 billion in bonds in March.

The company will take a first-quarter write-down of about $1 billion, or 10 cents, to comply with a new rule that changes the way it must account for goodwill from acquisitions. GE had net income of $2.6 billion, or 26 cents, on sales of $30.5 billion in the 2001 quarter.

The increased scrutiny comes as GE's power systems division, its largest nonfinancial unit with about 16 percent of sales last year, is nearing a peak in deliveries in turbines. The company has been selling more service contracts and providing more services to cushion the slowdown.

The company has said it's assuming no improvement in economically sensitive businesses such as plastics this year.

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