General Electric Capital's (NYSE:GE) conference call today had no negative surprises; they expect to survive on $7B of GE Industrial's cash flow even in the Fed's worst case. You can check the transcript at GE's website for details (see links below). For GEC generally, the rest of this year is going to be slightly profitable; next year will be a bitch, and the next five years will be tight.
Put those Eastern Europe rumors to rest; GEC is profitable in the Czech Republic and Romania, they are expanding slightly. UK real estate is the reason next year's guidance is negative; if that market does not turn around by the end of the year ("peak of UK nonearners is 2010"), then GEC will need some of GE Industrial's cash flow to cover those losses.
GEC is continuing to invest in small business, and its JVs are doing well considering the macro. GEC payed too much for its CRE portfolio; GEC is not expecting the CRE portfolio to effect cash flow, but they do not expect to have any return from that investment for about five years. GEC has increased its reporting and reserves to commercial bank levels in order to avoid, or anticipate, regulations; GE does not expect any issues with splitting into bank/ industrial companies for at least five years.
In my opinion, investors can write off GEC for the next five years. The GEC CRE portfolio is an enormous drag on margins. The UK may make a miraculous recovery, but it looks like a good chance that early next year cash flow from GE will cover GEC losses in UK. No one can estimate how much that may be, but it will not effect GE's cash flow, thus price, for another six months. Most likely GEC will generally break even over the next five years, so I will focus on GE Industrial alone until GEC stabilizes.
Back to GE, the big segments had excellent quarters considering the macro. Energy infrastructure revenues were flat, profits were up 13%, and PM was 19%, up from 16% YoY-- very impressive. Tech Infrastructure rev was down 11%, earnings down 11%, but PM steady at 17%. GE's two smaller segments did not fare as well. NBC profit was down 41% and Consumer and Industrial profit was down 20%. And, let's shoot down another web rumor: Aviation's rev was up slightly, earnings were up 18.6% and PM was up to 21.2.
Most importantly, GE's cash flow is $7B so far, ahead of GE's "base case," and is expected to be $14-16B. Profit margin without GEC wass a healthy 9.9% last quarter. Remember, GE's rev and CF guidance do not include stimulus revenue; GE has 180B in play in the stimulus market; what percentage of that will turn into 10% profit?
At this exact moment, GE is most likely to surprise up the next two quarters with the stimulus, and is most likely to disappoint with UK RE in early 2010. Looks like four more tumultuous quarters, but I remain long GE.
Disclosure: Long GE.