GE posts sales slump, rattles recovery hopes

General Electric CEO and Chairman Jeffrey Immelt gives a speech during a conference in Tok...

By Scott Malone, Reuters
Fri Oct 15, 2:57 PM EDT

General Electric Co posted a sharper-than-expected drop in revenue on slack demand for wind turbines, railroad locomotives and other heavy equipment, reflecting weakness in the economy.

The largest U.S. conglomerate's 5.1 percent decline in sales overshadowed better-than-expected profit and sent GE shares down 5.5 percent on Friday in their steepest slide since July as some investors took it as another sign that the economic recovery is faltering.

The better-than-expected profit reflected lower corporate expenses and a stronger performance at the company's GE Capital unit, which saw losses on loans decline and recorded more tax benefits than analysts had expected in the quarter.

Revenue came to $35.89 billion, below the $37.54 billion analysts had expected, according to Thomson Reuters I/B/E/S. The shortfall also reflected faltering demand for gas turbines and jet engines.

"I'm a little concerned about the broader manufacturing sector, that this may be a bit of a harbinger," said Peter Sorrentino, portfolio manager at Huntington Asset Advisors in Cincinnati.

Profit growth has returned for much of corporate America this year -- GE notched its second straight quarter of increase after more than two years of decline. But much of the improvement to companies' earnings reflects cost-cutting during the recession, and investors are increasingly focused on revenue as the likeliest indicator of sustainable growth.

GE shares were down 95 cents at $16.22 on the New York Stock Exchange in midafternoon, while the the Standard & Poor's capital goods industry index was off 1.3 percent.

Investors will get a more detailed look into the sector's future next week when manufacturing heavyweights United Technologies Corp, Caterpillar Inc and Honeywell International Inc report their results.

There have been a number of signs in recent weeks that the U.S. recovery is slowing. U.S. Federal Reserve Chairman Ben Bernanke said on Friday there was a case for further easing of monetary policy in light of lingering high unemployment.

RIDING THE 'NEW NORMAL'

GE's overall order backlog held steady at $172 billion.

"In the new normal world, you can't expect to see much in backlog growth," said Jack De Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire. "It would have been positive to see it growing. It didn't, and I'm thinking foreign exchange may have had something to do with that. Next quarter they'll probably get a tailwind in their backlog."

Chief Executive Jeff Immelt reported rising orders for both equipment and services -- an indicator of future sales, the first time both have increased in two years.

"We expect positive earnings growth in the fourth quarter in our industrial businesses and in NBC Universal," said Immelt, who has led GE through one of the roughest patches in its history over the past few years. "We're going to see some pretty good momentum from a business standpoint and an operational standpoint."

The company expects earnings per share to rise through 2012.

Profit from continuing operations -- which factors out GE's pruning of its finance arm, primarily the sale of its Japanese consumer lending business -- came to $3.16 billion, or 29 cents a share, up 29 percent from $2.45 billion, or 22 cents a share, a year earlier. On that basis, GE beat Wall Street's earnings forecast by 2 cents per share.

The company said the decline in revenue in part reflected its efforts to trim back the capital business, which emerged as its Achilles' heel during the credit crisis and recession. The finance unit's revenue fell 3 percent in the quarter, while sales its GE's energy infrastructure unit fell 14 percent.

Chief Financial Officer Keith Sherin said the company is interested in buying back the preferred stake GE sold to Warren Buffett's Berkshire Hathaway Inc for $3 billion ahead of schedule, though it has not yet opened negotiations on that topic with the famed investor.

"After NBC closes, we think it would be a good use of that cash if we could retire that early," Sherin said in an interview.

The company aims to close the sale of a majority stake in its NBC Universal media business to No. 1 U.S. cable operator Comcast Corp later this year.

So far this year, GE shares have risen about 13 percent, outpacing the 6 percent rise of the Dow Jones industrial average, of which it is a component.

(Reporting by Scott Malone, additional reporting by Nick Zieminski and Ryan Vlastelica in New York, Atul Prakash, Harpreet Bhal, Simon Falush and Dominic Lau in London; Editing by Derek Caney and Matthew Lewis)