Wall Street crisis hits GE

GE already warned that profits will take a hit and received a vote of confidence from Warren Buffett. But investors remain worried about GE's finance division.

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By Aaron Smith, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- All eyes will be on GE on Friday when the massive conglomerate and market bellwether reveals earnings that have been hard-hit by recent turmoil in the financial markets.

In particular, investors are focused on GE Capital, its financial services division, which has been squeezed by the sector-wide implosion on Wall Street.

The company already warned last month that profits for the third quarter and full year will be lower than expected because of problems in the financial division.

GE said profits from its money and commercial finance divisions should total $2 billion in the third quarter, down nearly 20% from $2.45 billion in the second quarter. This area includes insurance and credit cards, as well as commercial, home and personal loans.

As a result, GE (GE, Fortune 500) said it expects third-quarter earnings to be in a range of 43 cents to 48 cents per share, down from its prior guidance of 50 to 54 cents per share. Analysts are now expecting a profit of 45 cents a share. The company earned 48 cents a share a year ago.

The big question facing GE investors though is how much worse of a drag will the finance division be going forward?

Nigel Coe, an analyst for Deutsche Bank, wrote in a report last week that he was cutting his earnings forecasts for this year and next and now thinks GE's profits will decline in 2008 from a year ago and fall again in 2009.

He said "deterioration at GE Capital -- driven by tighter credit markets, asset shrinkage and debt paydown" would further drag down results next year.

GE Capital is a huge contributor to the company's overall earnings. The problems facing GE have led some analysts to speculate that GE may look to unload some assets in order to raise capital.

But James Hardesty, president of Hardesty Capital Management, which counts GE as it biggest holding with more than 600,000 shares, said there's not a lot more that Chief Executive Jeffrey Immelt can do with GE Capital.

Hardesty noted that since Immelt took over as CEO back in 2001, he has taken steps to scale back GE Capital while boosting other areas such as healthcare. The division now accounts for about 40% of operating profits compared to nearly 60% in 2001, he said.

"In an ideal world, he'd have [GE Capital] down to a third," said Hardesty. "[Immelt] did a lot. He just didn't get finished."

But now, it's too late for Immelt to get a good price for GE's financial assets, said Hardesty. "I think he's going to tough it through."

To be sure, not all the news is bad for GE. The company is being propped up by its better-performing industrial businesses.

The infrastructure division, which makes a wide array of big ticket items such as jet engines and wind turbines, is expected to post double-digit percentage earnings growth thanks to strong global demand.

GE also said when it lowered its earnings targets that its media division, mainly the NBC television network, performed well in the third quarter due largely to the ratings success of and advertising revenue from the Summer Olympics.

It's also not clear if GE really needs more capital now that the influential investor Warren Buffett cast a big vote of confidence for GE on Oct. 1. His Berkshire Hathaway firm agreed to buy $3 billion worth of GE stock and made a commitment to potentially buy another $3 billion.

But since these plans were announced, GE's stock has declined more than 15%, in step with the S&P 500. So far this year, shares of the conglomerate have plunged 44%, underperforming the market by a wide margin. To top of page

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