GE Credits Capital Unit Rebound for Strong Earnings
The light at GE Capital Services (GECS) was burning a little brighter on Friday after its parent General Electric's (GE) earnings announcement. Analysts gave it the proverbial thumbs up after GE earnings for the first-quarter of $1.9 billion exceeded expectations, even though Wall Street had been looking for higher revenues. Wall Street had been waiting to see how the struggling business unit would fare, concerned that mounting commercial real estate losses would pull the performance down for the mega-conglomerate.
But such was not the case. GECS' commercial leasing and lending (CLL) and commercial real estate (CRE) performed well.
"GECS stabilization appears on-track with non-earning receivables in CLL falling for the first time since 2008 and charge-off rates in CRE likely peaking this quarter," Scott Davis, a Morgan Stanley anlayst, said in a research note Friday. "GE now believes the potential injection needed from the parent into GECS will be lower than originally expected -- trends here are improving."
GE 'Exceptional' Case Hoard
Davis further noted that any financial hiccup with GECS may now have a cushion, thanks to GE's "exceptional" cash hoard of $10 billion. The funds could help serve as a buffer to any disappoints in GECS, or be returned back to investors in the form of dividend increases, or stock buybacks, for example.
Nigel Coe, a Deutsche Bank analyst, attributed all upside in his GE forecast to GECS. Said Coe in a research note: "We are encouraged by the earlier and sharper than expected decline in GECS losses and non-performing assets, which can provide significant upside to the GE Capital framework as referenced by management."
Despite reporting a 5% decline in revenues and a 35% reduction to earnings, the CEO of GE touted the company 's performance as a rebound story.
Immelt Touts Rebound Story
"GE Capital's losses have peaked and commercial real estate losses are manageable," Jeffrey Immelt (pictured), said during a conference call with analysts. "I think this is key when looking at GE going forward...GE Capital's rebound has begun. We've turned the corner and have a spring in our step."
GE, once a darling of the corporate world for its ability to execute, has managed to stumble over the past decade as it has evolved, restructured and repositioned itself from primarily an industrials behemoth to a major player in the world of finance, real estate and media.
GE reported net profits of $1.9 billion, or 17 cents per share in the quarter that just ended, a decline from 26 cents per share a year ago. GE's revenues, meanwhile, fell to $36.6 billion in the quarter, down 5% from the previous year.
Results Slightly Beat Estimates
That performance slightly beat analysts earnings expectations of 16 cents a share, but fell short of their revenue forecasts of $37.1 billion, according to Thomson Reuters.
GE's first quarter performance, however, failed to raise the pulse of its investors. GE shares slid as low as 3.79% to $18.76 during early afternoon trading, failing to reverse its path against a broader market decline.
Morgan Stanley's Davis observed: "Rumors over the past week that GE would raise dividend today were irrational but fueled some of the run-up into the quarter. Modest sell-off not a surprise given this context. However, bears point to soft orders (we'd say timing issues) and questions on further losses in Japan consumer finance. All fair points.
Revenue Down at GE Capital Finance
In breaking down G.E.'s five business segments, here's how they stacked up:
GE Capital Finance, its largest business segment, reported revenue fell 10% to $12.3 billion, as its income dropped 41% to $607 million.
Immelt largely pointed to the strength in G.'s other lines of business, noting there were "solid signs of stabilization" in GE's first quarter results and encouraging economic signs, from increases in airline passenger passenger miles and freight loadings to declines in receivables' delinquencies to growth in local advertising markets.
In the company's energy infrastructure business, it generated nearly $8.7 billion in revenues, a 5% drop from the previous year. But that segment grew profits by 12% to $1.48 billion, compared with the previous year. Revenues for this segment came in weaker than some on the street had expected, but its profits were far more impressive than expectations.
Technology Infrastructure Hit with Double Whammy
Technology infrastructure was hit with a double whammy of both declining revenues and profits. Revenues fell 9% to $8.66 billion and profits tumbled 18% to $1.4 billion, compared with last year. This segment fell short in both regards compared to one analyst's expectations.
The company's NBC Universal business performed better than expected on the revenue generation side, thanks to the Olympics, but its profits took a hit. Revenues were up 23% to $4.3 billion, but profits were beaten down with a 49% decline to $199 million.
Meanwhile, GE's Home & Business Solutions business posted a meager 1% increase in revenues to $1.94 billion and a 58 percent profits gain to $71 million. While revenues were in line with expectations, its profit gain was short.