Jeff Immelt will get to explain the recent General Electric Co. (NYSE: GE) earnings SNAFU all over again today. Frankly, all we really care about at 247WallSt.com is what lies ahead rather than rehashing what we already saw.
We probably won’t be hanging on for every single comment this morning, but there was at least some addressing of the current climate and some remedies it seeks. For starters, the company is now targeting for $3 Billion in cost cuts rather than $2 Billion. The company also said it will more frequently review its entire portfolio, which translates to the possibilities that the company can have more spin-offs or divestitures down the road.
What is interesting here is that cost cutting is getting harder and harder to achieve. GE already has one of the longest pay cycles to suppliers in the world. Last time we checked, prices of energy, metals, transportation, and everything tied to raw materials that it needs for manufacturing are sharply higher.
These cost cuts unfortunately may only be in layoffs. Worker productivity is going to get harder and harder to milk. Investing in technology works, but robots aren’t yet able to work for humans in every task.
The good news for the rest of the economy is that GE’s portion of disappointment was actually worse than what many other companies are seeing. Maybe GE is no longer representative of the entire economy now that it has spun off so many units.
Shares are up after the open, but only by $0.05 to $32.38. You can look over our determination of a fair value for GE in 2008, which came to $33.75 for year-end, and that translates to $31.25 to $31.83 today depending on how you discount for time value and ROI expectations.
Unfortunately, the old goal of 20% return on capital is just going to be asking for too much. It’s a different climate right now, and Wall Street has already brought its expectations lower after the company did. Without stating the obvious, the company needs to make sure that its forecasts from two weeks ago can be met. Another unexpected major disappointment won’t be responded to with any praise from Wall Street.
Here is a link to listen to the webcast.
Jon C. Ogg
April 23, 2008
Jon Ogg is a producer of and editor for both the Special Situations newsletter and the "10 Stocks Under $10" weekly newsletter for 247WallSt.com; he can be reached at email@example.com and he does not own securities in the companies he covers.