General Electric (GE) management met with a group of analysts and journalists for a closer look at the books of GE Capital. The meeting was billed as a deep dive and according to reports, that is exactly what they got with meetings going for more than five hours. This is exactly the sort of transparency that the market has demanded from GE Capital which has been run in somewhat of a “black box” as they are not subject to the same reporting rules as a bank holding company. The greatest unknown has been what GE was going to have to claim on the balance sheet, all that was apparent for a long time was that there was a massive amount of debt. In this market that is enough to make investors hesitant, and with details being hard to come by up until now, many feared the worst.
The meeting yielded some interesting results, as the company reveled some projections of how the company might fare given certain macroeconomic trends. Remember that in December GE claimed that GE Capital would make $5 billion in profit in 2009. The company maintains that there is a very good chance that GE Capital will make a profit, albeit a smaller one. GE says that, if the Fed’s baseline predictions of 8.4% average unemployment and GDP shrinking by 2% are correct, then GECC should expect to make between $2 – $2.5 billion for the year. Furthermore, GE gave a break even point for GE Capital would be a more serious recession where unemployment averages 8.9% and GDP shrinks at 3.3%. According to CNBC’s Power Lunch:
“You might argue, depending what assumption you believe, you’re a believer of the base case or adverse case, GE Capital is effectively lowering expectations, but the scenarios are what investors have been looking for, one grounded more in the realistic outlook.”
The main point of all of this was to explain to the market that GE does have strong assets on the books, but they are not immune to a deepening recession any more than any other company. The portfolio of assets at GE Capital certainly does have some exposure to commercial real-estate, and thus would be adversely effected by any expansion in unemployment and any further shrinking of the economy. Importantly, deleveraging was an major focus of the agenda as well. GE stressed that they will be lessening their massive debt load by $30 billion this year and $35 billion next year. GE will also be lowering its dependence on short term commercial paper from $90 billion last year to $50 billion. Whether this deleveraging will dampen growth remains to be seen.
GE stock is slightly positive right now, and the news is about as good as could be expected. Investors knew that there were risks in GE Capital’s portfolio, this just lends some transparency to the situation that was extremely lacking. Furthermore, this seems a step in the right direction to giving credibility back to the management team at GE that has stumbled its way through this recession thus far.