- NEW YORK (Reuters)
- General Electric Co. may bring good things to life, but for its stock
investors things don't look so good right now.
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- GE shares on Thursday fell to their lowest level in a
month on concern the world's largest company, as measured by stock market
value, is taking on too many risks to help it grow.
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- The shares, which fell $1.10 on Wednesday, dropped another
$1.35, or 3.5 percent, on Thursday to close on the New York Stock Exchange
at $37.45. GE was the biggest percentage loser among the 30 stocks comprising
the Dow Jones Industrial Average. The shares had fallen as low as $36.84.
Bonds of GE's finance arm also weakened.
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- GE shares were the second most actively traded on the
Big Board, with volume topping 42 million shares.
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- The slide came after powerful bond fund manager Bill
Gross of Pacific Investment Management Co. on Wednesday lambasted Fairfield,
Connecticut-based GE's disclosure practices and heavy debt burden, and
three days after Moody's Investors Service said GE's finance arm, General
Electric Capital Corp., has "funding risk" because it relies
heavily on short-term debt.
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- "With all that has gone on with Tyco (International
Ltd.), Global Crossing (Ltd.), Enron (Corp.) on down the line, GE should
have known they would be a target of increased scrutiny," said Michael
Schroeder, chief investment officer of Wasmer Schroeder & Co. in Naples,
Florida. He did not say whether he owns GE shares.
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- After the close, GE Chief Financial Officer Keith Sherin
moved to reassure investors that GE's finances are sound.
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- In a statement, Sherin said GE Capital expects to cut
its reliance on short-term debt, known as commercial paper, which now totals
$103 billion, and is talking with banks to boost their lending commitments
to $50 billion from $33.5 billion. He also reaffirmed GE's $1.65 to $1.67
earnings per share target for the year.
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- Sherin made his comments after Gross, who manages the
$53 billion PIMCO Total Return fund, the world's largest bond fund, on
Wednesday said GE should have disclosed plans to file with securities regulators
its intent to raise up to $50 billion before it sold $11 billion of bonds
last week.
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- Sherin said the filing gives GE Capital the flexibility
to refinance $31 billion of long-term debt maturing this year.
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- DISCLOSURE
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- Critics have labeled GE, whose operations include financial
services, aerospace, the NBC television network and the making of appliances
and light bulbs, a complicated conglomerate that fails to disclose in sufficient
detail how it regularly posts double-digit annual earnings growth, and
the accounting methods that it uses to produce the results.
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- "GE and GE Capital have a degree of arrogance --
that's assumed -- but to try to equate GE to a giant hedge fund is a stretch,"
said Bentley Myer, who invests $2 billion in short-term debt for William
Blair & Co. in Chicago, including $100 million of GE Capital commercial
paper. "We have no intention on cutting back" on that commercial
paper, he said.
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- Responding to investors' concerns over the integrity
of corporate accounting, GE this month released an annual report that it
said contained 30 percent more "content" than before.
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- "It remains a large complicated company that has
added more disclosure," said Thomas Mahowald, director of equity research
at American Express Financial Advisors in Minneapolis, which owns GE shares,
though he would not say how many. "Has it added enough disclosure?
For my purposes, I would say yes."
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- GE Capital's bonds weakened on Thursday for a second
day, but like the shares finished off their lowest levels.
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- Its 5.35 percent five-year notes yield 0.92 percentage
points more than similar maturity U.S. Treasuries, up from 0.9 on Wednesday
and 0.8 on Tuesday, while its 6.75 percent 30-year bonds yield 1.22 percentage
points more than Treasuries, up from 1.21 on Wednesday and 1.11 on Tuesday,
traders said.
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- LIQUIDITY RISKS
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- Investors have grown more concerned about companies'
ability to sell commercial paper after phone company Qwest Communications
International Inc. and conglomerate Tyco International Ltd. were this year
shut out of that market and forced to tap $18 billion of credit lines.
-
- "Triple-A" rated GE Capital, with $127 billion
of short-term debt, according to Moody's Investors Service, is asking its
banks to boost its credit lines from $33 billion, which it can tap if it
has trouble selling commercial paper.
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- "The risk today is not new from a credit perspective,"
said Deborah Cunningham, senior vice president for Federated Investors
in Pittsburgh, where she oversees $135 billion of commercial paper. "We
own no less than we did yesterday. We have no qualms about their health
as an ongoing concern."
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- What Gross's attack has changed, she said, is how investors
view GE Capital.
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- "We are now being forced to monitor the market reaction
to 'headline risk'" surrounding GE, said Cunningham. "Yes, they
are acquisitive, but there may have been a lack of due diligence on the
part of market participants on the liquidity profile of GE Capital."
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- GE Capital's three-month commercial paper yields about
0.1 percentage point less than the London Interbank Offered Rate, or LIBOR,
about what it did before Gross's comments appeared, investors said. LIBOR
is now 1.972 percent.
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