By Scott Malone
BOSTON (Reuters) - General Electric Co
The U.S. conglomerate expects fourth-quarter profit to be at the low end of its prior forecast and said it aims to pull back from riskier finance businesses, such as consumer mortgages and some equipment finance, and reduce its reliance on the troubled commercial-paper market.
Investors welcomed the idea of restructuring GE Capital, even as GE officials warned they do not expect that business to return to growth until 2010.
The finance arm, with businesses ranging from investing in real estate to commercial lending, was largely responsible for GE's 12 percent profit drop so far this year.
"Obviously the macro environment remains very challenging," said Keith Sherin, GE's chief financial officer, in a briefing with investors on Tuesday. "We know that we have to reduce our cost structure in this environment."
GE reiterated its intention to pay a $1.24 per share annual dividend next year and maintain its triple-A credit rating. Moody's Investors Service affirmed its top rating on GE and GE Capital with a stable outlook, meaning that a rating change is not likely over the next 12 to 18 months.
"The company is confident it can sustain the dividend in 2009," wrote Sterne Agee analyst Nick Heymann in a note to clients. "We sense the company is working on some new initiatives which could help reassure investors that the company's earnings prospects in 2009 will not fade as the global economy becomes more challenging."
GE, which has seen its shares beaten down about 52 percent so far this year amid concerns about its financial arm, most recently pledged to keep its 2009 dividend last month.
Its shares rose $2.11, or 13.6 percent, to close at $17.61 on the New York Stock Exchange, off an earlier high at $17.79. The 13.6 percent gain for the day was GE's biggest in percentage terms since at least 1981.
JOB CUTS PLANNED
The company expects to take $1 billion to $1.4 billion in fourth-quarter after-tax charges related to restructuring. It is considering unspecified job cuts at both GE Capital and across its industrial units, which make products ranging from jet engines to refrigerators.
"People are giving them the benefit of the doubt that they have their hands around the problem right now," said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which manages about $20 billion in assets and counts GE among its holdings.
He said more changes were likely at GE Capital, which the company has already started to restructure by merging its former commercial finance and consumer finance arms and unveiling plans to cut costs by $2 billion next year.
The Fairfield, Connecticut-based company expects quarterly earnings of 50 to 52 cents per share, compared with its prior guidance of 50 to 65 cents per share. Wall Street analysts on average had looked for profit of about 51 cents per share, according to Reuters Estimates.
Company officials said they are planning for U.S. unemployment to reach 8.5 percent by the end of 2009, up from 6.5 percent in October, and expect at least one U.S. airline to liquidate next year.
GE Capital expects to earn about $5 billion next year, down from a targeted $8 billion this year. It expects the finance business to return to double-digit earnings growth in 2010.
"We remain cautious about buying into the recovery call," wrote J.P. Morgan analyst Stephen Tusa in a note to clients, saying he expects a further profit drop of 5 to 10 percent at GE Capital in 2010.
"SAFETY FIRST"
GE aims to lower the leverage ratio of its GE finance unit to six-to-one next year, from a seven-to-one target this year. To do that it is considering moving about $5 billion in capital into that business, with the funding coming from the $15 billion the company raised earlier this year in a stock offering, Sherin said.
"Safety first is really how we're thinking about the business," said Michael Neal, CEO of GE Capital. "We're in a very difficult credit cycle right now."
GE plans to reduce its outstanding commercial paper to $50 billion next year. That would be down from $88 billion at the end of the third quarter.
(Additional reporting by Dena Aubin in New York, editing by Dave Zimmerman, Derek Caney and Matthew Lewis)
