GE's credibility gap with investors

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NEW YORK (Fortune) -- General Electric stock has fallen 72% over the past year amid concerns about rising losses at its finance arm, GE Capital. In an attempt to reassure investors, the company will deliver a detailed, five-hour presentation on GE Capital to investors in New York this Thursday.

In an interview on CNBC that aired March 5, GE's chief financial officer Keith Sherin acknowledged that GE (GE, Fortune 500) has a credibility problem with investors. "We've got to earn that trust back." he said.

"We recognize that we've made statements about both not raising equity and about not cutting the dividend and we've had to backtrack on those," Sherin said. He blamed these reversals on the uncertain economy.

He said that the best way to regain trust is to be as transparent as possible, and that Thursday's presentation about GE Capital should help provide that clarity.

"This meeting is clearly an attempt to lessen investor worries about rising credit losses, asset write-downs and dilutive equity raises," wrote Sanford Bernstein analyst Steve Winoker in a research note. "GE Capital has always been a 'black box' in terms of disclosure relative to its banking peers. CFO Keith Sherin has promised more detailed disclosure of GE Capital's assets and loss estimates at this meeting, and we applaud the move, but our opinion is that GE must disclose nearly everything investors demand or else risk exacerbating investor doubts about credibility and transparency."

Some analysts believe credit losses at GE Capital will be greater than the company says it expects, specifically in commercial real estate, U.S. credit cards, and U.K. residential real estate. In his CNBC interview, Sherin said that these segments would all be discussed during the presentation.

Analysts also have questions about GE Capital's earnings. Citigroup analyst Jeffrey Sprague believes that it is unlikely that GE Capital (referred to in his note as GECC) will meet the company's previous guidance. He writes: "S&P noted that management's GECC earnings guidance of $5 billion is unlikely and even has the potential to be negative in '09. We are currently modeling GECC net income at [about] $3 billion."

Deutsche Bank sees GE Capital earning $2.9 billion for 2009. Citi's Sprague adds that large tax credits could offset losses at GE Capital, but that "the reliance on big tax credits underscores the erosion of GECC's earnings power. That said, it is clear management's outlook remains substantially too optimistic."

Sanford Bernstein's Winoker says he wants more clarity around GE exposure to what he calls "at-risk geographies," including Eastern European banking and real estate exposure in Florida, California, and Nevada.

He also wants to know whether the industrial side has the capacity to inject more money into GE Capital and, if so, how much more. He also wants to know under what circumstances the company would raise common equity or consider using TARP, or even spin off GE Capital.

The company has on several occasions said that it has no plans to separate GE Capital from GE. In his CNBC interview, Sherin said that an "incredibly disastrous economic situation" would have to unfold before GE would use TARP funding, and it would only do so if all other backup plans would not work.

Sherin also said that the speculation about GE Capital is overdone, that the company is in an "incredibly strong liquidity position" that includes $45 billion in cash, and that GE Capital will be profitable in the first quarter.

Much is riding on Sherin's ability to back up these statements. As Winoker said in his note, "After numerous quarters and years of disappointments, with GE, investors have adopted a 'show me' attitude to the company and are now punishing the stock with the same pressures faced by financial institutions over the last year."