GE’s profit shortfall underscores credit crisis

Corporate giant General Electric Corp. stunned Wall Street yesterday with a sudden drop in earnings that showed the widening credit crisis and economic slump is reaching even the healthiest U.S. businesses.

GE’s stock plunged the most in 20 years and helped drag the Dow Jones Industrial Average down 256 points after the company reported a 12 percent decline in first-quarter profit — its first in five years — and dim prospects for the rest of the year.

While GE’s international infrastructure-building business was strong, the company encountered unprecedented difficulties selling financial assets in the United States.

“The financial services environment was very difficult and became even more difficult late in the quarter,” said Chief Executive Officer Jeff Immelt, who only weeks earlier had assured investors of earnings growth of at least 10 percent this year. He cited the March 16 collapse of Wall Street giant Bear Stearns Cos. as the reason for the company’s woes.

“Particularly after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments,” he said.

GE is one of only five AAA-rated corporations worldwide, and its troubles accessing the credit markets underscore how seriously broken the credit system has become.

“It fuels the debate on how deep a slowdown we might be facing,” since even the top-rated corporate credits are now encountering problems, said David Ader, bond strategist with RBS Greenwich Capital. The stock market’s reaction also was “reflective of the ongoing skittishness around near-term economic prospects.”

GE’s sudden trouble selling credit-card assets and its profit drop to $4.36 billion from $4.93 billion a year earlier did not endanger its gold-plated ratings. Standard & Poor’s Corp. said it still expects “GE’s broad business and geographic diversity to allow for continued generous free cash flow alongside a strong financial profile and adequate capital.”

The difficulty of selling assets that were securitized from the GE’s credit-card business shows how the credit challenges have spread from the mortgage market to other consumer sectors. Anticipating trouble, GE was looking to sell the credit-card business but did not get out in time.

“They were not able to foresee the weakness in the U.S. consumer to the extent they should have,” said Richard Hoffman, analyst at CreditSights Inc. GE’s shares plummeted 13 percent to $32.05 in New York trading, wiping out $47 billion in value for shareholders.

Some analysts said the pothole GE hit was caused not only by credit difficulties but the conglomerate’s far-flung businesses on nearly every continent, spanning such industries as entertainment, health care, consumer goods and industrial manufacturing.

“That diversity looks rather like a recipe for mediocrity as declining financial earnings offset infrastructure successes,” said Rob Cox, analyst at Breakingviews.com.

“Immelt’s ability to maintain GE’s model is compromised,” he said.

But others said the unexpected roadblock GE ran into means trouble for stock investors who have assumed that financial troubles will remain concentrated in banks and Wall Street firms most exposed to the credit crisis. They say the depth of the economic woes has been underestimated in many sectors, from retail to recreation.

“There are grounds to believe there’s another drop in the market yet to come,” said Michael Mandel, economist with Business Week. “The reason: a broad decline in consumer spending, which so far has been masked by a quirk in the government’s statistics.”

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