GE's bad news: Why nobody cares
It wasn't that long ago when a warning from GE would cause panic on Wall Street. Now, the conglomerate is being treated as just another troubled financial stock.
NEW YORK (CNNMoney.com) -- How wacky is this market? General Electric slashed its earnings guidance for the third quarter and the whole year and Wall Street didn't even blink.
Of course, the main reason for the bump in stocks Thursday was the news that Congress had agreed on a bank bailout deal.
"GE's earnings are important, but a $700 billion bailout plan is more important," said Alan Skrainka, chief market strategist with Edward Jones in St. Louis.
Nonetheless, GE is one of the largest companies in the world. GE usually moves markets. In April, an earnings miss from the company caused its stock to plummet nearly 13% and dragged down the Dow by 2%.
At the very least, GE's earnings warning is yet another sign that corporate profits in the third quarter will probably be fairly weak.
And when you couple the GE news with two discouraging economic reports released Thursday - jobless claims were up more than expected while durable goods orders fell at a larger than forecast rate -the market's reaction this morning is a bit puzzling at first blush.
Should investors dismiss GE's woes so casually? In addition to the reduced guidance, the company also said it was suspending its buyback program.
That's bad news considering that other cash-rich companies - most notably Microsoft (MSFT, Fortune 500), Hewlett-Packard (HPQ, Fortune 500) and Nike (NKE, Fortune 500) - are taking advantage of their low stock prices to expand their stock repurchase plans and boost earnings per share.
Still, there might actually be some good news in the market's reaction to GE's latest problems. (Yes, I'm already bracing for the usual dose of hate mail from the doom and gloomers who think I'm way too optimistic. Bring it!)
Simply put, the fact that the market isn't plummeting on GE's news might actually be a good sign. It may reflect that the worst is already baked into stocks, especially with hopes growing for an imminent bailout announcement.
"Right now, with sentiment as low as it is, bad news is probably accepted as a given. So any glimmer of good news will push stocks higher," said Jack Ablin,chief investment officer with Harris Private Bank in Chicago.
After all, should anyone really be surprised that GE had to cut its forecast? The company blamed its GE Capital division for the lowered outlook, citing "unprecedented weakness and volatility in the financial services markets."
Really? We hadn't noticed.
Seriously though, GE generates about a third of its sales and earnings from its financial services division. So if anything, it would have been a surprise if GE didn't have to cut its profit targets.
"Companies are cautious and rightly so," said Skrainka.
And if you wanted any further proof that GE is getting hit hard by the credit crunch, consider this: Earlier this week, the New York Stock Exchange added GE to the list of financial stocks that have been temporarily, and I think misguidedly, put off limits to short sellers.
Fortunately, GE's other businesses do not appear to be getting hit hard by the weak economy, which may also explain why investors aren't panicking about the earnings warning.
GE said it still expects decent profit growth in its infrastructure business, which sells industrial products to the aviation, energy and transportation industries, thanks to strong global demand. This unit is GE's largest, accounting for about 40% of revenue and profits.
So for the time being, GE's earnings are not that big of a concern to the broader market because they aren't telling us anything we didn't already know.
The company is just another financial stock that's getting crushed by credit concerns. Shares are down about 31% this year, in line with the drop in the S&P Banking Index.
"GE is in the finance business and I think if you look at GE's problems they are very much indicative of the problems on Wall Street," said Haag Sherman, managing director with Salient Partners, an investment firm in Houston.