The big banks cut ratings and estimates for GE after Friday’s earnings bomb. Analysts worry about GE’s ability to perform in a deteriorating macroeconomic environment and justifiably blast the firm for blaming the miss on “market disruption” when health, media, and other divisions blew it, too. Instead, analysts blame poor internal controls and risk management and argue that GE has become too big to manage.
Slowing U.S. growth and difficult capital markets pressured results across the portfolio, with profit growth below our expectations at all segments. It is shocking to us how weak results were across the portfolio. Healthcare, Industrial, GE Money and Comm’l Finance all posted declines. Mgmt attributed $0.05 of the miss to an inability to complete asset sales and higher mark-to-market losses and impairments at GECS but even adding that back it’s a miss.
Expect To Hear More Calls for Break Up. Generally speaking, one quarter of disappointing results at any company doesn’t support a drastic change in strategy. However, in GE’s case, the magnitude of the miss coupled with weakness across the board begs the question – is the company simply too big to manage?
Cutting Estimates; Confidence Remains Low. Our estimates move to $2.20 and $2.45 for FY08 and FY09, respectively. We have limited confidence and wouldn’t be surprised to see the composition and quality of those estimates change as the year moves on. New guidance range calls for earnings to grow 0-5% but we still don’t feel like GE “kitchen sinked” the guidance.
Lehman was slightly more optimistic:
We think GE’s 1Q08 miss may cause investors to revisit the risk discount in GE’s shares. We view stock as undervalued at current levels and continue to believe GE remains a strong global force. However, near term negative sentiment could define where the stock trade
We are reducing FY08 EPS to $2.20 from $2.42 on 1Q miss, and outlook for continued headwinds from macro and credit envt. Our revised of PT of $37 represents a 17 P/E on our new FY08 est. GE missed meaningfully in 1Q, w/ EPS of $0.44 falling short of $0.51 cons. & $0.50-$0.53 guidance.
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