Why the Markets Yawned at GE Earnings
- Jan 28, 2005
- admin
- Investing
SO THAT WAS WHAT ALL THE FUSS WAS ABOUT LAST OCTOBER.
Up until now I didn’t know.
Of course I knew the fat cats in Congress were up to something.
With a name like the “American Jobs Creation Act” during a
presidential election year you have to be up to something.
But I dropped the ball.
Maybe it was because I was moving from one home to another.
Or that we had just taken out new office space in South Beach
for Tycoon Research.
Or that I was just to burnt out on election year politics to
really care.
Anyway I didn’t see it coming.
I was completely oblivious.
Didn’t smell the pork.
Until I read THE earnings announcement.
The one single earnings announcement that says more about
the state of the global economy than any other single earnings
announcement in the world.
The one earnings announcement that can change the direction
of the market on a dime.
Yes, a dime either way and the market changes.
The earnings announcement from the most admired, beloved,
widely-held, valuable and overall kick-butt company in the world-
General Electric (SYM: GE).
For the year the numbers impressive:
Revenues up 14% to $152 billion.
Profits up 11% to $16.6 billion or $1.59/share.
Yes, very impressive (even with acquisitions built in).
But then I read the real news of the announcement.
The news that I originally missed.
The news about their performance in the 4th quarter.
The news that General Electric’s profits were up an
astounding 18% for the quarter.
Think about that for a moment.
Most companies, regardless of size, seem to have problems even
hitting low double-digit profit growth.
10%…11%…12%…even 13% is acceptable for a big company.
But 18% growth in net income is different.
That’s closer to 20% growth than it is to 10% growth.
And its not the kind of profit growth you expect to see from
one of the largest companies in the world.
It’s the kind of profit growth you expect from Tycoon recommendation
–and 75% mover – K-Swiss (SYM: KSWS).
Or the kind you’d expect from Tycoon reco. Yankee Candle (SYM: YCC).
Well run, much smaller companies.
But not from G.E.
No wonder CEO Jeffrey Immelt was beaming.
He had every reason to be proud.
Maybe, just maybe, investors will start looking at him as
more than Jack’s puppet.
Maybe he’ll finally be able to put away his shine box.
Then I read the fine print.
The print that widows, orphans and some of us with less than
perfect eyesight didn’t read.
The print that told the story of how a pork rind becomes a tax break.
The print that said G.E.’s effective tax rate for the 4th quarter
was only 11.2 %.
That’s close to a 50% drop in the taxes the company had to pay last
quarter.
By division it’s even more striking:
GE’s industrial business had a tax rate of 16.7% for
the quarter versus 26% last quarter.
And GE Finance – their largest and most profitable division – had an
eye-popping tax rate of only 3% versus a 20% tax rate last period.
In other words, the 18% increase in profits was in large part due
to Congress passing pork during an election year.
Do I have a problem with that?
No, not really.
Although I’m not a shareholder of G.E. I do admire a company that
does everything it can to “maximize shareholder value.”
But the profit increase didn’t maximize value.
Instead, the markets sent the stock down .24 cents.
That’s because the difference in the tax rate – esentially a
multi-billion dollar gift from Washington to G.E. – is only a
one-time thing.
But it will have to be paid by somebody.
And do you know who that somebody is?
You.
Yes, you.
And me of course.
You see, for the government to give companies like G.E. over $120 billion
dollars in tax breaks – during a year with the highest budget deficits in
history – means that the governemnt must sell bonds to borrow money.
When the government sells bonds to borrown money it competes with private
investment.
That saddles you and me with more debt and sends interest rates
higher, making the lives of us investors more difficult.
That’s the bad news for us.
Want to know the good news?
There’s a rumor floating around Wall Street that G.E. will be sending
all shareholders a lifetime supply of pork rinds.
Remember, you are what you read…
–By Dylan Jovine