GE's Industrial Operations May Be Vulnerable Amid Economic Slide
12 Marzo 2009 - 6:11PM
Dow Jones News
General Electric Co. (GE) may still have to trim forecasts for
its industrial units this year, according to one investor, limiting
their positive impact as the company restructures its troubled
financial business.
The company, which suffered a ratings cut Thursday, is counting
on units producing big-ticket items such as aircraft engines,
energy generation equipment and medical devices to produce the bulk
of its forecast $16 billion in cash flow this year.
But the broad economic downturn, which appears to have picked up
some steam early in 2009, has the potential to hinder returns.
"I would expect some of that [order] backlog to be subject to
push-outs and cancellations," said Eric Boyce, a portfolio manager
at Hester Capital Management in Austin, which owns about 600,000 GE
shares.
"There's no question the book of business is going to contract
for everybody in the capital goods space" over the coming
weeks.
Jeff Immelt, GE's chief executive, acknowledged in a recent
letter to investors accompanying its annual report that the
industrial operations "face some headwinds" amid the downturn.
However, he stressed that GE's $172 billion backlog in
infrastructure products and services, as well as potential drivers
like stimulus spending by governments were a positive for the
company.
The conglomerate has consistently reiterated its December
forecast for industrial earnings to be flat to up 5% in 2009.
However, rivals in some of the business segments - including
United Technologies Corp. (UTX) and Emerson Electric Co. (EMR) -
have reported that conditions have continued to deteriorate in
recent weeks.
GE business segments that appear particularly vulnerable include
its transportation products, such as locomotives and aircraft
engines.
In his recent letter, Immelt acknowledged as much, noting that
he anticipates some order cancellations for aircraft engines and
for health care-related diagnostic imaging equipment. He said cost
cuts and revenue from maintenance and services should offset the
trends.
The conglomerate's energy-related products could be among its
most insulated, however, despite declining oil prices. GE has said
it anticipates "earnings and margin growth" for the segment this
year, based partly on long-term energy demand trends.
The short-term outlook for GE's industrial businesses hinges on
the depth and duration of the ongoing economic downturn, a dubious
prospect at a time when the slump shows few signs of turning.
"I think you're seeing [economic] weakness here in March that
was not anticipated in January," Boyce said. However, he said the
industrial businesses are worth more than the current stock price
even on a "trough-earnings" basis. The question that only time can
answer is whether the trough has been reached.
GE shares were up 11.8% recently, or $1.00, at $9.49.
-By Bob Sechler, Dow Jones Newswires; 512-394-0285;
bob.sechler@dowjones.com