GE's Earnings Miss: What Ever Happened to Warning Investors First?

What ever happened to warnings season? Aren't companies like General Electric (GE) supposed to warn investors of an earnings miss during the two weeks prior to the Alcoa (AA) report? After reporting net income of 44 cents a share vs. the 51 cents a share estimate, General Electric (GE) CEO Jeff Immelt explained, "We had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments and this was something that we clearly didn't see until the end of the quarter," Immelt said.

There is nothing that investors hate more than surprises. Today's investment world demands transparency and full disclosure, which brings us to the big question, When did Immelt know about the miss? The Bear Stearns meltdown occurred on March 17th and Alcoa kicked off the earnings season on April 7th. Shouldn't a stalwart company like GE, with their pristine earnings history, be expected to give investors a heads up on unusual circumstances? I want to be careful not to unfairly single out GE. The consumer slowdown has been widely anticipated and yet warnings season was especially quiet. I expect this trend of 'failing to meet' expectations will continue, there will be countless other CEO's who must answer the same questions: what did you know, when did you know it, and why didn't we get a warning?

When a company offers forward looking guidance they are showing respect to the system. Respect to analyst's who cover the stock, respect to investors, and respect to the general public who are trying to make well informed decisions. When a company reports a warning they are doing the same thing. Earlier this year, on January 18th, GE offered guidance of .50-.53 cents a share but mocked the system by not warning of the pending miss as soon as they knew about it. People will try to defend GE by saying that this happened late in the quarter which left them no time. That defense is inadequate for GE shareholders who thought they were in a low risk equity. According to data published on earnings.com, the company had either met or beat expectations for 13 consecutive quarters and the last miss in Q3 of 2005 was only by a penny. Jeff Immelt could have avoided these attacks if he would have just disclosed what he knew when he knew it. You can do just about anything in this world as long as it's fully disclosed. Now investors are going to throw GE in the same basket as Goldman Sachs (GS).

Two companies who were content to let others take the credit crunch fall while they quietly sat on the sidelines. Investors of GE and GS go into this weekend feeling that their trust has been violated. The guiding principle for CEO's is simple; public disclosure earns you respect, fail to do so and you open yourself up to some tough questions. We'll see how Mr. Immelt gets treated over the next few weeks... it definitely won't be business as usual.

Disclosure: None

Comments

[punk_ash]

give me a break, most companies will beat the estimates. You know how, its the analysts who will make sure they beat the estimates. They will quietly lower the #s. I look forward to seeing the companies beat the #s.

[User 133624]

Are you serious? The market conditions after the Bear Stearns fiasco made it impossible for GE to pre-announce. The market would have fallen much further at that time.

[CreativeInvestor]

I don't agree with the author's point that companies absolutely must forewarn investors about what is going to happen on a bi-weekly or monthly basis or whatever. I mean, seriously, what difference would it have made? GE simply would have taken the fall two weeks earlier. Any time companies provide guidances it increases speculation in the market since markets are given a reason to speculate. Obviously, management should provide investors with expectations for the coming year, but they bear absolutely no responsibility to give you a warning that they will miss the quarterly earnings estimates two weeks in advance.

[Billy@ bigloss]

We should be hearing from Jeff very soon, looking for His replacement.

[karchad]

Can't see at all why GE's results were such a surprise. At this point, it's primarily an investment company!

[RPK]

Companies should not provide earnings estimates and/or guidance. When companies do not provide such information, most if not all analyst are unable to provide accurate earnings estimates.

Additionally, reiterating the previous comment, I am unsure why GE's earning miss was a surprise. A good chunk of their revenue comes from commercial and consumer finance.

If anything the strength and geographical diversity of their industrial divisions earnings shows the benefits of their business model.

[wisdomseeker]

The obvious conclusions are that (a) they didn't know sooner than 3/31 themselves that they couldn't get the sales done in Q1, and (b) there were other, more systemic problems with the earnings and the "blame Bear" tactic is just window dressing.

Why is it that everyone is focusing on the "lack of advance warning", and then on the "Bear Stearns connection"? Sure, maybe they could have met their guidance if they'd gotten the magic pixie dust on some key asset sales in March, but that's not why the earnings sucked.

The ACTUAL EARNINGS REPORT shows BROAD-BASED WEAKNESS across many of GE's lines of business! This is a recession-induced earnings miss, spread systemically across the company - not just a subprime / financial crisis-induced miss.

[raceluver]

It is inconceivable the CEO of GE did not know in advance the level of GE's earnings shortfall. I am a corporate executive and it is no secret to say that corporate executives (let alone the CEO) know way in advance of the earnings release what the real forecast will be. I am of the opinion, the GE CEO actions are completely unacceptable and border on being unethical. What about the rest of the so called expert analysts who only hours prior to the earnings release were reporting "strong" and "solid" earnings for GE??!! They should pack their bags and find other jobs instead of misleading the public.

[vaduz]

it rally is a disappointment - and i guess not the last revision of the "guidance"

[notsosmart]

better off listening to the blackjack dealer than the ceo's. the bs these people put out is what got them hired in the first place. it worked with the board why not with the st. & the public. and then- sorry you must go but heres a multi million $ good bye for the lousy job. bring on the next charlatan-welcome.

[nyka]

Plain and simple-- let the buyer beware, i.e.,avoid investing in stocks; put your money under the mattress.