Tue, Oct 16, 2001 page19

• GE's earnings rise 3 percent over last year

  The US' largest company by share value was hit by insurance losses but Wall Street is still gung ho about prospects

  • By Claudia H. Deutsch / NYTIMES NEWS SERVICE
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  General Electric Co said Thursday that its third quarter earnings rose 3 percent over the same period last year, despite huge insurance losses related to the Sept. 11 terrorist attacks. Without those losses, which carved US$0.04 a share off earnings, the increase would have been 16 percent. GE also vowed to generate double-digit earnings growth this year and next.

  Investors were pleased with the results and with GE's announcement that its NBC unit would buy Telemundo Communications Group. GE shares rose US$1.04, to US$38.95.

  

  General Electric's new chief executive, Jeffrey Immelt at his Manhattan office in the Rockefeller Center.

  PHOTO: NY TIMES

  "In this environment, no one would have thought it horrible if GE stepped away from its promises of double-digit earnings growth," said Jeanne Terrile of Merrill Lynch. Other analysts noted that GE had effectively used layoffs and Internet technologies to bring costs down. "The whole company is well ahead on the cost curve," said Michael T. Regan, an analyst at Credit Suisse First Boston.

  Still, Jeffrey Immelt, GE's chairman since Sept. 7, faces huge challenges. The terrorist attacks have increased NBC's costs for news coverage, even as the network ran many commercial-free hours. The attacks will result in at least US$400 million in insurance payouts. They will weaken sales of aircraft engines, already hurt by an airline industry slowdown. In addition, they have probably accelerated and deepened a broad economic downturn that was already hurting GE's economically sensitive businesses.

  GE earned US$3.28 billion, or US$0.33 a share, in the quarter, up from US$3.18 billion, or US$0.32 a share, in the same quarter last year. But GE's revenues for the quarter were US$29.4 billion, down 8 percent from last year's US$32 billion.

  The comparison is a bit skewed -- GE still owned Montgomery Ward in last year's third quarter, and NBC was reaping huge revenues from the Olympics -- but analysts warn that the prospect of slower growth is real.

  "If GE is to keep posting double-digit earnings growth, it will have to match reductions in costs to reductions in revenues," warned Robert Friedman of S&P Equity Research, one of the few analysts who says he thinks GE stock is overpriced.

  Some GE businesses -- G Medical Systems, Immelt's alma mater, is a notable example -- continue to predict heady growth. But G Aircraft Engines will probably see a big downturn in orders soon. And, as global power generating capacity catches up to demand, GE Power Systems is unlikely to maintain the nearly 40 percent annual growth it has shown in the last two years.

  Immelt is also battling the Environmental Protection Agency, which has ordered GE to spend US$500 million to dredge the Hudson River of polychlorinated biphenyls, or PCB's, that GE legally released into the river decades ago.

  Immelt discussed the subject in an interview last month and, through a spokesman, said his views remained unchanged.

  "This isn't about spending US$500 million on some magic bullet," Immelt said, noting that GE has already spent US$200 million on removing the PCBs. "I'm in the business of gathering facts and acting on them, and dredging remains a debatable technical solution."

  Many analysts noted that GE's materials business was weaker than they had expected this quarter. And several suggested that GE would be better off without its lighting and appliance units. "Such businesses give them a good presence with the consumer, but they don't really fit in with GE's services-oriented, high technology business model," said James P. Ruskin, an analyst at the Dreyfus Corp, whose portfolios include GE stock.

  Still, few analysts voiced severe criticisms or concerns. Immelt apparently won them over three weeks ago when, in his first meeting with analysts as chairman, he said GE could weather the economy in the aftermath of the attacks.

  In a presentation peppered with football metaphors -- "I'll play a little offense here," "We didn't dust off the playbook and start practicing on Sept. 11" -- Immelt said that GE had been trimming costs for more than a year, and that its diversified portfolio would enable it to offset losses in insurance and aircraft engines. He also said the company would probably start making acquisitions soon.

  Apparently, Immelt also dispelled any doubts that he could measure up to his predecessor, John Welch Jr. While stocks in general have risen about 11 percent over the last three weeks, GE's share price has risen about 29 percent.

  "Jeff showed presence, a mastery of detail and a feeling for the big picture," said James N. Kelleher of Argus Research.

  Regan put it more succinctly: "With all due respect, Jack who?"

  All told, Wall Street remains gung-ho about GE's prospects.

  "The economy won't be anyone's friend next year," said Nicholas P. Heymann of Prudential Securities. "But they've still got the ability to contend with any economic environment.
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