The Enron effect is prompting investors to question GE’s 100 consecutive quarters of profit growth. However, the new disclosures should answer the skeptics. Although some divisions are suffering from the recession, its strategic business model means that other areas are cushioning the blow.
GE is set to improve its disclosure of financial information.
CEO Jeffrey Immelt is preparing to disclose further information about the group’s assets and liabilities. The collapse of Enron has meant increased scrutiny for several large US companies, including the largest by market value, GE, the financial services and industrial conglomerate. The group has posted 100 consecutive quarters of profit growth, leaving many analysts and investors wondering just how it has achieved this meteoric success.
Shares in the company have fallen by 9% in the year to date as concerns about the accuracy of its earnings statements have persisted. Mr Immelt will address these concerns by releasing new asset and liability disclosures and holding a conference call to discuss the earnings issue.
So how has the company seen such strong growth when the global economic conditions have been weak? GE’s profitability has been underpinned by a number of factors. Its diverse interests have meant that when one division of the business suffers, others are able to support it.
The group has also successfully switched from a product to a service model. Approximately half of group revenues are now derived from high-margin service contracts. Finally, GE has acquired profitable businesses to supplement existing operations, with new purchases now accounting for 15% of profits at major divisions like Power Systems.
GE is well placed to answer its sceptics by using its Power Systems division as an example. This unit is the largest non-financial division and accounted for 16% of sales in 2001. The North American gas turbine market, a crucial one for the division, has experienced a serious slowdown. Although the gas turbine order book will take some two to three years to clear, many analysts expect the market slowdown to be visible in the Power Systems accounts.
However, the successful switch to profitable service and maintenance contracts should cushion the effect of the fall in sales, and mean a soft landing for the company. As a result GE should continue to see rising profits. With Mr Immelt leading the counter offensive, the group is well insulated against the Enron effect.
Related profile: Datamonitor, 2002: General Electric Company