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  • Bellwether GE Cuts Forecasts

    WSJ reports GE cuts its earnings guidance and announced a number of moves, including suspending its stock buyback, to strengthen capital and liquidity.

Reggie Middleton reported  GE: The Uber Bank???
Note: Professional Subscribers can download the full and ultra informative forensic analysis here: icon GE_ResearchReport_04July2008 (163.44 kB 2008-08-30 06:31:05). 

General Electric (GE), the largest conglomerate in the world, has significant operations in the industrial and financing sectors. Considering the ongoing credit turmoil and the worsening macro economic scenario, GE remains exposed to significant risk considering its exposure to the real estate and consumer finance business. However, the stock price has corrected significantly, declining 35% since the announcement of the 1Q 08 results. GE missed its 1Q 08 guidance significantly due to problems with the Commercial Finance and GE Money segments. GE has a significant exposure of US$87 billion toward the real estate market; higher write down’s are expected in the coming quarters. Moreover, GE Money is expected to witness higher losses on account of the rise in defaults in its mortgage and credit card portfolio. GE’s higher loss provisions, going forward, and rising inflation will impact the company’s profitability. GE also plans to sell its appliance business due to a decline in profitability and weakening demand. In addition, GE intends to spin-off its Private Label Credit Card business as the company aims to reduce its consumer finance operations. This sell-off would result in dilution of EPS in the coming quarters. However, we believe the Infrastructure segment would continue to report healthy performance, going forward, driving the growth of the industrial business. The growth in the industrial business is expected to help GE offset the decline in its financing business.

Key Investment Points

GE’s real estate exposure warrants significant write-down’s in the coming quarters

GE’s Commercial Finance segment has real estate assets totaling US$87 billion comprising a mix of physical real estate and financing to third party investors. This segment has approximately US$40 billion of real estate financing receivables as of December 2007. GE Capital Services (GECS) includes Commercial Finance, GE Money, and the aviation and energy financing businesses of GE Infrastructure. GECS accounts for approximately US$40 billion of GE’s investments in real estate. Real estate investments consist of real estate held for investment and equity method investments. Investments in real estate consist of a range of properties with office buildings accounting for 49%; apartment buildings, 14%; industrial properties, 11%; retail facilities, 9%; franchise properties, 7%; parking facilities, 2%; and other, 8%. Geographically, the Americas account for 48% of these investments followed by Europe and Asia with shares of 33% and 19%, respectively.

GE aims to decrease volatility in its real estate earnings by reducing its dependence on the equity portfolio due to more lumpy and volatile returns and move toward a steady stream of income from third party financing. The ongoing turmoil in real estate markets and continuous decline in housing prices due to falling demand and rising foreclosures makes it difficult for GE to execute real estate deals. Moreover, the macroeconomic headwind, credit turmoil, and lack of liquidity in the markets are expected to restrict the number of transactions in real estate markets. As witnessed in 1Q 08, tough market conditions resulted in a decline in real estate transactions. GE sold 56 properties for US$1.7 billion in 1Q 08 and added assets totaling US$7 billion. Of this, senior secured debt accounted for approximately 85%, in line with the company’s aim to change its real estate portfolio mix. However, the decline in potential buyers resulting in a fall in prices and consequently gains would lead to lower earnings. 

The company’s non-earning receivables (NPAs – 90 days past due) in real estate are 0.38% of its outstanding receivables. However, 30-day delinquencies are 0.36%, down four basis points compared to last year. In the Commercial Finance segment, delinquency rates increased to 1.36% in March 2008 from 1.26% in March 2007. The continuing liquidity crunch, rise in borrowings cost, and worsening macroeconomic conditions can lead to increased delinquencies. This in turn would cause higher writedowns on the real estate portfolio. In the Commercial Finance segment, real estate contributed 22% to total revenues; this segment registered a 16% decline in profits in 1Q 08 due to difficult market conditions.

Revenues from the Commercial Finance segments increased 7%. However, profits fell 20% due to the decline in asset sales, higher mark-to-market losses, and impairments. Going forward, with worsening macroeconomic conditions and the housing slump showing no signs of recovery, the Commercial Finance segment could witness higher writedowns and mark-to-market losses.


Source: Company data


Rising defaults in revolving and installment credit could result in higher NPAs in GE Money segment

GECS, the financing business unit of GE, derives 35% of its top line from GE Money, a leading provider of credit and banking services to consumers, retailers, and auto dealers worldwide. GE Money has approximately US$175 billion of financing receivables, of which approximately 42% (US$74 billion) is toward non-US residential mortgages; US$34 billion, non-US installment and revolving credit; and US$30 billion, US installment and revolving credit. Of GE Money’s non-US mortgages worth US$74 billion, 26% (i.e., US$19 billion) accounted for introductory, below market rates scheduled to adjust at future dates with a high loan to value (LTV).
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