GE's profit dragged by finance arm

NEW YORK (CNNMoney.com) -- General Electric Co. posted a first-quarter profit Friday that fell substantially from year-ago results, dragged down by weak earnings at its embattled finance division, but the results still beat Wall Street's expectations.

The conglomerate's net income fell 35% to $2.9 billion, or 26 cents per share. Analysts polled by Thomson Financial had forecasted earnings of 21 cents per share.

Revenue for the Fairfield, Conn.-based company fell 9% to $38.4 billion, which missed analysts' forecast of $39.8 billion.

GE's (GE, Fortune 500) shares fell less than 1% in early trading.

GE Capital earned $1.1 billion in the quarter, down 58% from a year ago. The company acknowledged headwinds are facing the division but said it has taken efforts to stabilize the unit and maintained the division is on track to be profitable for the full year.

"Revenues and profitability declined year-over-year in our financial services business and we continue to experience rising delinquencies," said GE Chief Executive Jeff Immelt in a statement. "However, we have taken prudent actions to address these challenges, including tightening risk requirements, improving liquidity and reducing leverage."

Despite many calls to sell off the finance and lending arm, GE has said it is sticking by GE Capital. At a March 19 meeting with investors, with unprecedented transparency, the company reduced its earnings outlook for GE Capital by half, but said its finance division would be adequately capitalized, even if the economic downturn turns even worse than expected.

GE reiterated that claim Friday, saying that estimated stress-test results show the company will not need to raise additional capital, even under the Federal Reserve's "adverse-case" scenario.

Though GE is not subject to a federal stress test, Immelt said on a conference call with investors that the company wants hold itself to the same standards that the Fed and Treasury are using for big banks. The government is testing whether major financial institutions' capital levels are sufficient to keep the companies stable if the economic situation worsens. The results are expected to be released in May.

Many investors have been worried about GE's need to raise more capital to cover potential losses, especially on mortgages and other loans issued by its finance arm. Those concerns were exacerbated when the company slashed its quarterly dividend to a dime in late February and had its credit rating downgraded one notch to AA-plus last month.

GE Capital was particularly hurt this past quarter by its mortgage lending business, which suffered a $173 million loss on revenue that fell 48%. The company's profit from its consumer loan business fell 27% in the quarter, and business lending earnings dropped 68%.

Despite some signs of improvement in the mortgage defaults in the United States, Keith Sherin, GE's chief finance officer, said on a conference call with investors that the U.K. mortgage market remains stressed. As a result, he expects real-estate-related losses to worsen throughout the year.

Still, GE maintained that the finance arm would carve out a profit of between $2 billion and $2.5 billion in 2009.

According to Citigroup analyst Jeffrey Sprague, GE's earnings beat Wall Street's expectations for two reasons: a $318 million tax credit and an increase in its loss provisions at troubled finance division GE Capital that was 20% lower than expected.

GE previously said it would set aside $11.5 billion to cover losses at its finance arm this year, but the company only upped provisions $2.3 billion in the first quarter. Sprague said in a note to investors that GE will likely increase that amount as the year progresses to keep pace with its forecast.

With businesses ranging from manufacturing to finance to media, GE is seen by many as a proxy for the broad U.S. economy, and tough economic times have yielded weak profits at the company. Its media division, NBC Universal, was profitable, but earnings fell 45% from last year largely on the high costs of airing the Super Bowl in February. GE's consumer and industrial segment profit fell by 75%.

But other businesses are managing to weather the economic storm. Earnings in the company's energy infrastructure division grew 19%, and its technology infrastructure business grew earnings by 6%.

Those units are expected to perform even better if GE is able to successfully bid on some of the government's stimulus contracts. Immelt said on the conference call that stimulus should help speed up more than $100 billion of infrastructure projects in the company's pipeline, including implementation of smart grid technology and health IT projects. But Immelt said it would take a while to realize stimulus profits, and GE would see little benefit until 2010 or 2011.

Even with the success of those infrastructure units, the company still plans on reducing costs by $5 billion in 2009 to address weak overall profit.

"We are aggressively managing our cost structure to respond to challenging global economic conditions," Immelt said. "We've reduced headcount and are managing company operations more efficiently, leading to improved operating leverage in our infrastructure businesses."