GE Could Set Example on Disclosure

General Electric Co. may be getting ready to give skeptical investors more disclosure about the accounting behind its earnings increases and about GE Capital Services, the huge financial services division that accounts for more than 40% of the giant corporation’s profit.

It would be an important move for GE, which has seen its once highly regarded stock slump almost 12% this year and more than 30% in the last 52 weeks because institutional investors complained that its accounting revealed little of how the company made its profit or how heavily indebted GE Capital really was.

A lot could be riding on greater disclosure by GE. It is one of only nine U.S. companies with a triple-A credit rating, a status that allows the firm to borrow at lower rates than almost all other companies. Intensifying skepticism about the firm could endanger that credit rating, although Moody’s Investors Service and Standard & Poor’s Corp. are not conducting any extraordinary review of GE at this time.

Also, GE--the biggest U.S. company by stock market value--could set an example of clear, forthright accounting for corporate America if it opened up to investors, some analysts say.

GE didn’t address those questions Tuesday. But Jeffrey Immelt, its chief executive, issued new reassurances.

“GE isn’t a ‘faith’ stock; it’s a performance stock. We have tremendous financial strength and a system of controllership that is second to none,” Immelt said in a statement released at GE headquarters in Fairfield, Conn.

Immelt, who has held the CEO’s job for five months, has been forced lately to make a lot of defensive statements about GE. Last weekend in London, where he addressed the company’s employees in Britain, the 43-year-old executive defended GE’s complex corporate structure and accounting but said GE may disclose more financial details in the annual report for 2001, which it will issue the second week in March.

GE stock, which had been beaten down steadily in recent trading sessions, recovered Tuesday to $36.21 a share, up $1.21 on the New York Stock Exchange, after Immelt restated his earlier prediction that GE earnings for 2002 would rise 17% to $1.65 a share from $1.41 in 2001.

However, the 17% figure overstates the true growth rate of the company’s eight major businesses, which include aircraft engines, the NBC television network, insurance, leasing and worldwide lending. Earnings get a boost this year from a new accounting rule that says companies no longer have to deduct excess payments made for acquisitions--”goodwill,” in accounting terms.

“Back out that accounting change, and GE’s underlying growth rate is about 10%,” said analyst William Fiala of brokerage firm Edward Jones & Co.

If huge GE, which last year had $125.7 billion in revenue and $14billion in profit, can grow 10% in this economy, that wouldn’t be a puny accomplishment, Fiala said. But in the post-Enron climate, investors want clearer information on just how GE does it.

Sophisticated investors say GE Capital, which had more than $66 billion in revenue and $5.5 billion in profit on its own last year, is central to the steadily increasing earnings that won GE renown under just-retired CEO Jack Welch.

GE Capital, at $425 billion in assets, is one of the largest financial companies in the world. GE started it to help its customers finance purchases of GE’s appliances, aircraft engines, power plants and other products. But it now also provides insurance, finances consumer loans, provides leasing of aircraft and other products and performs other financial functions, taking market share from banks.

But it is not regulated as are banks and some other lending institutions. Thus it has many advantages. GE Capital was able to buy distressed real estate in the recession of the early ‘90s and wait to profit from an upturn in values, says analyst Richard Schmidt of Standard & Poor’s. A regulated finance company or bank would have to get nonperforming loans and real estate off its books.

In a similar move, GE Capital bought enormous amounts of junk bonds when those securities were at their low point and has been able to feed profit into parent GE’s reported accounts over a decade, says an expert in the high-yield securities.

As GE Capital has grown into a global finance company, it has acquired financial companies in Japan, which can borrow at almost zero interest from the Bank of Japan and profit hugely by lending in other countries. It was car loans in Thailand that first alerted Jack Welch to the “immense opportunity” GE Capital represented, Welch wrote in his best-selling autobiography, “Jack.”

In turn, parent GE has injected $1.5 billion of capital into the financial subsidiary in the early ‘90s, demonstrating its explicit backing of the division’s finances. GE Capital enjoys the parent company’s triple-A credit rating.

The point about GE Capital is that in the wake of Enron Corp.’s collapse amid bizarre accounting abuses, investors are concerned about a finance division that can feed earnings increases into a vast industrial company. Yesterday, analysts and investors may have praised GE’s financial ingenuity. But today they are questioning the almost seamless success that the giant firm has demonstrated for almost two decades. Does GE represent solid industrial progress or only sophisticated financial maneuvers in a global market? they ask.

So GE is challenged to increase disclosure. Analyst Fiala sees it as an opportunity for the firm to dispel doubts about itself and to “set the new standard for other firms.”

Analyst Nicholas Heymann of Prudential Financial says GE has been here before. “Often when unilateral concern about GE’s fundamentals hits a peak--as when problems developed at [its Kidder Peabody brokerage unit] during the mid-1990s--the stock has been misvalued versus the market,” Heymann writes in an analysis of GE.

He and many analysts do not doubt GE, but then most investment analysts didn’t doubt Enron until it was much too late.

The bottom line is that Immelt and GE will have to increase disclosure. Because if they do not clear up questions about the firm’s accounting, institutional investors may drive the stock down and demand a breakup of the complex, century-old landmark company.