Financial Accounting Blog

Saturday, October 11, 2003

G.E. Earnings Decline 11%; Key Product Lines Sluggish - The Lowly p-e Ratio is back!
Ref: NY Times article, Published October 11, 2003.

Hobbled by high costs and sluggish sales in formerly stellar industrial businesses like power systems and aircraft engines, GE said yesterday that its third-quarter earnings were 11 percent lower than those of last year, and that full-year earnings would be $1.55 to $1.57 a share.

The announcement, however, came at the end of a week of big acquisitions that have laid out a blueprint for a GE that will be less dependent on old-line production businesses and their services, and far more tied to fast-growing ones like health care and communications.
This week alone, GE completed plans to merge its NBC unit with Vivendi Universal's entertainment assets, GE Medical Systems completed the acquisition of Instrumentarium, a Finnish company that makes hospital equipment, and GE said that it would acquire for about $9.5 billion in stock Amersham of Britain to add chemical expertise in drugs and diagnostics to the GE Medical Systems portfolio of equipment, software and services.
"We are positioning the company for long-term, high-value growth," Jeffrey R. Immelt, GE chief executive, said. However, he conceded that some of these acquisitions were unlikely to add to earnings before 2004.

Prior to Sept. 11, 2001, the company's profits were growing at a double-digit pace. The events of Sept. 11 knocked the economy into a tailspin — and saddled GE’s insurance unit with huge claims. Since then, the persistently sluggish economy has hurt sales of such disparate GE items as plastics, gas turbines and aircraft engines.

The acquisitions also make it clear that Mr. Immelt, while still intent on growing consumer finance and other select parts of GE's large financial services portfolio, still sees inventing things and selling services against them as a way to future growth. Because the shares of industrial companies generally trade at higher multiples to their earnings than those of financial companies, that emphasis could lift GE's share price.

The stock could use the help. Shares of GE, which topped $32 in mid-September, fell 81 cents, to $29.32, yesterday.

During the boom years, price-to earnings ratios zoomed off the charts. Wall Street analysts told us p-e ratios did not matter. Well, the lowly p-e ratio is back, and at least in the short term, the p-e ratio will be a good measure of the success of GE’s acquisition strategy to bolster growth in a struggling economy.

Joseph Thodiyil
October 11, 2003.