Message Font: Serif | Sans-Serif
No. of Recommendations: 5
Dear y'all,

I wish to comment on your "Motley Fool Take" for Dec. 18/01, in particular on the GE comments:

I cannot comment on Mr. Immelt's forecasts, other than to say they look awfully optimistic, but I wouldn't bet against GE. However, there is some fudging in the net income number.

In GE's press release,

there are included in the 2002 estimate "a positive $.04-$.06 per share for the net effect of two non-cash items: a change in accounting for goodwill and a lower estimate of long-term returns on pension assets."

Without actually seeing the annual report I can only guess on exact specifics; but here's an attempt to break these down.

First, starting in 2002 companies no longer have to amortize goodwill. I'm not saying that this is wrong, in fact in a lot of ways this is closer to "reality" than the current system; but I wouldn't really count the gain as "earnings growth". GE is an acquisitive company, so this effect is pretty big. I haven't tabulated GE's many acquistions in 2001, but as of 2000 GE (including GE Capital, whose results are often broken out separately) had $23.5 billion in goodwill, and had an amortization charge of $1.06 billion. I think that the amortization charge would likely be higher in 2001 (more purchases!), but assuming it were the same, my calculations say that this is roughly a $0.106/share gain which is definitely "one-time" in nature.

Concerning the second component, the pension accounting. GE has a substantially overfunded pension plan. It became overfunded because for many years, GE has assumed a pension plan return of 9.5%, yet actually delivered high-teen returns. This overfunding can be realized as pension plan income, $1.27 billion worth of it in 2000. If you believe someone like Warren Buffett, stock returns will be more like 6-7% returns going forwards, and in fact GE's return on pension plan assets in 2000 was 2.6% (and including $2 billion in payouts, pension plan assets decreased in 2000). At some point going forwards, the overfunding will be run down, but "at some point" can easily be several years away; this gives Mr. Immelt a seriously large "fudge factor" for his net income. I think that Mr. Immelt is doing is reducing expected return on assets slightly to delay the "some point", and to take a few pennies off of the $0.106/share gain from net income arrived at above; after all, 18% EPS gain is plenty good for net income, let's save some gains for 2003!

There are many nuances to the 18% net income figure Mr. Immelt is putting out, not all of them directly relate to operations. GE is a great company, but they are famous for fudging income numbers. If I may humbly suggest this to the Fool writers, this sort of thing may be good for a future "quality of earnings"-type column at some point.


Lleweilun Smith
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.