GE Falls Most on Dow as Goldman Warns of Cut to Profit Forecast

(Bloomberg) -

General Electric Co. fell after Goldman Sachs said the manufacturer’s restated financials put its 2018 profit forecast at risk.

“A cut to the outlook is ‘almost a certainty,’ and could come as soon as GE’s first-quarter report later this week,” Joe Ritchie, a Goldman Sachs Group Inc. analyst, said in a note. JPMorgan Chase & Co. said that last month, it also expects the forecast to be trimmed.

The profit hurdles were underscored late last Friday as GE retroactively cut its 2016 and 2017 results to reflect new U.S. accounting standards. “While GE had warned investors about the change and the actual figures were ‘more benign than bear-case expectations,’ last year’s revised profit was still worse than GE had previously suggested,” Ritchie said.

“GE foresees ‘no impact’ to its 2018 forecast from the restatement,” the company said in an email to shareholders Friday.

A forecast cut would deepen the pain for shareholders as GE struggles with a seemingly never-ending slide. The Boston-based maker of jet engines and gas turbines has lost $164 billion in market value since the beginning of last year, while grappling with weak demand for industrial equipment, as well as management turmoil and cash-flow challenges.

GE fell 1.4 percent to $13.31 a share at 11:17 a.m. in New York — the biggest decline in the Dow Jones Industrial Average. The stock was at $13.30 at 2:10 p.m.

The company has said that the new rules will change the presentation of financial statements, but won’t affect its cash, profit forecast or alter the underlying economics of customer contracts.

The restatement of the past two years’ earnings stems in part from a set of revenue recognition principles issued by the Financial Accounting Standards Board in 2014. The new standard, adopted by GE at the beginning of this year, affects how and when companies record sales from equipment and service contracts; thereby more closely aligning work with the impact on financial statements.

GE’s revised 2017 results were slightly worse than expected. In a regulatory filing after market close on April 13, GE said that the accounting change would trim last year’s per-share earnings by 17 cents, a penny more than previously predicted.

Including a change to inventory practices, GE announced a $2.5 billion reduction to 2017 segment earnings before interest and taxes. “That was about $400 more than expected,” Ritchie said. He maintained a neutral rating on the stock, while cutting his expectation for 2018 earnings by 3 cents a share, to 87 cents. Analysts expect 94 cents on average, according to estimates compiled by Bloomberg.

While GE has stood by its forecast for adjusted earnings of $1 to $1.07 a share, Chief Financial Officer Jamie Miller said in February that the company was heading toward the bottom of that range, after revealing a charge against an insurance portfolio and plans to shrink the GE Capital unit.

GE could still reach $1 in adjusted earnings through cost cuts, according to Melius Research. And the fact that GE didn’t cut its forecast along with the restatements — “seems like a good sign,” analyst Scott Davis said in a note.