Drop in GE profit shocks Wall Street
Corporate America’s Rock of Gibraltar was looking shaky Friday, and that triggered a landslide on Wall Street.
General Electric Co., known for the dependability of its earnings, stunned the financial world by saying its first-quarter profit sank 6%. Even worse, it reported earnings of 43 cents a share -- nowhere near the 51 cents analysts expected -- and cut its profit forecast for the rest of the year.
The GE news, along with a report showing that consumer sentiment dropped to its lowest level in 26 years, had investors rethinking the strength of the economy and the stock market.
The Dow Jones industrial average sank 256.56 points, or 2%, to 12,325.42. All but one of the Dow’s 30 stocks fell.
Aside from its enormous size, GE’s diverse product lines -- industrial products, commercial finance, healthcare and media -- have long made the company a stand-in for the economy’s health.
“Everyone in the market sees GE as almost the Rock of Gibraltar -- quarter-in, quarter-out delivering low double-digit results that investors had come to prize and look for,” said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J. “Because of its size and diversification, it’s seen as a proxy for the global economy.”
The sell-off -- Wall Street’s worst in almost a month -- raised fears about whether the market’s stabilization of the last few weeks can hold.
Investors had lately been buying stocks even in the face of seemingly bad news. That had stirred hope that the worst was over for stock prices even if the economy was likely to keep sliding for a while.
Investors often buy stocks because they anticipate an economic upturn within the next six months or so, meaning the economy could have turned the corner by the fall.
But GE’s numbers cast that scenario in doubt.
“It adds to the risk that the slowdown could be a bit stronger than expected,” said Gary Schlossberg, senior economist at Wells Capital Management.
GE suffered weakness across several major divisions, most acutely at its commercial and consumer finance units. That was partially expected given that the turmoil reverberating through global credit markets has felled most financial companies, and the environment was particularly treacherous in March.
But earnings also sagged at GE’s healthcare and industrial divisions, suggesting that economic weakness is striking across the company.
Only its infrastructure and NBC Universal divisions clocked earnings gains.
“It is shocking to us how weak results were across the portfolio” of businesses, wrote Nicole Parent, an analyst at Credit Suisse, in a research note.
Investors also were disappointed that GE’s large presence overseas -- where economies are generally strong and where the weak dollar boosts earnings in the U.S. -- couldn’t insulate the company from domestic troubles.
“We hate to disappoint investors,” Jeffrey Immelt, GE’s chairman, said in announcing the results.
The company said net income fell to $4.3 billion, or 43 cents a share, from $4.57 billion, or 44 cents a share, a year earlier. Revenue rose 8% to $42.2 billion, missing GE’s forecast of about $44 billion.
The company’s shares plummeted $4.70, or 12.8%, to $32.05 -- the largest drop since the 1987 stock-market crash -- vaporizing $47 billion in market value Friday.
“It was pretty shocking,” said Michael Church, a money manager at Church Capital Management in Yardley, Pa. “People weren’t expecting a [profit] miss, let alone a miss of that magnitude.”
The poor results caught investors flat-footed because GE has a reputation for consistently meeting or slightly exceeding earnings estimates through all types of economic conditions.
In the previous 40 quarters, GE had matched analysts’ earnings-per-share estimates in 32 of the periods, and beaten them in the other eight, according to researcher Thomson Financial.
Analysts excoriated the company, with a Goldman Sachs Group analyst proclaiming that the earnings miss raised “credibility concerns.”
Church speculated that investors might begin pressing the company to dismantle itself, arguing that the disparate business lines are too unwieldy to manage.
GE’s performance raised the specter that sales and profit margins at other industrial companies could disappoint, and many industrial stocks declined on Friday.
The broader Standard & Poor’s 500 fell 27.72 points, or 2%, to 1,332.83, while the Nasdaq composite index was battered for a loss of 61.46 points, or 2.6%, to 2,290.24.
Also troubling the market was the Reuters/University of Michigan index of consumer sentiment.
The index fell to 63.2 for April, its lowest point since 1982, from 69.5 in March. Economists polled by Thomson/IFR had, on average, expected a reading of 68.
Sagging consumer confidence often hasn’t equated to a spill in actual spending, but experts were taken aback by the size of the falloff.
In other market highlights:
* The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.47%, from 3.54% Thursday.
* Crude oil futures rose 3 cents to $110.14 a barrel in New York trading.
* The GE earnings report and consumer sentiment data combined to drive down the dollar against the euro. The euro rose to $1.584, from $1.574 Thursday. Gold futures fell $4.70 to $923.60 an ounce.
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Times staff writer Tom Petruno and Times wire services contributed to this report.
