By Don Miller
Associate Editor
Money Morning
Both Citigroup Inc. (C) and General Electric Co. (GE) released first-quarter earnings reports Friday, posting better-than-expected quarterly profits. But analysts threw up caution flags to investors that might consider wading into either stock.
The shares of both companies were hammered when investors headed for the exits as the lockdown in credit markets, broad exposure to clandestine derivative securities and declining real estate values threatened their viability.
Here are the quarterly highlights and what analysts are saying...
Citigroup Reports Profit But Still Seeing Red
Citigroup ended a five-quarter losing streak by reporting $1.6 billion in profit on trading gains and an accounting provision. But after accounting for one-time costs related to preferred dividends, the bank actually reported an 18-cent loss per share.
That topped the average estimate of a loss of 32 cents per share by 13 analysts surveyed by Bloomberg. By comparison, first-quarter profits a year earlier were $5.11 billion, or 34 cents, the New York-based bank said.
Citigroup has suffered heavy losses from the credit crunch as loans and "toxic" financial products on its books drove its stock down to below a dollar in March. The big U.S. bank had to be rescued by $45 billion in U.S. taxpayer funds from the government's Troubled Asset Relief Program (TARP).
The company responded by reducing its workforce by about 13,000 since the fourth quarter of 2008. That cut operating expenses by 23% on a year-over-year basis. The bank's capital reserves also improved dramatically.
But higher trading revenues from fixed-income trading helped Citigroup's results - as was the case with Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM).
That led some analysts to question how much longer the banks could keep raking in profits should they suffer revenue declines in that segment.
"We've seen good trading results from JPMorgan, from Goldman Sachs and now from Citi," Gary Townsend, chief executive officer of Hill-Townsend Capital LLC, told Bloomberg News. "There is a question about sustainability."
Others noted that just a few weeks ago there was widespread concern that Citigroup might have to file for bankruptcy, which would have completely wiped out investors holding its shares.
David Trone, an analyst at Fox-Pitt Kelton, advised caution even though government support and additional capital are probably enough to keep existing shareholders from disaster "for now," Bloomberg reported.
"For prospective new investors, it may be too early to dive in, given continued high-risk exposures that may well require more dilutive actions," Trone wrote in an April 9 note to investors.
GE: Does 36% Profit Drop Signal a Bottom for Economy?
General Electric's first quarter profit clocked in at $2.9 billion, a 36% decline from $4.47 billion last year. The company earned 26 cents per share on revenue of $38.4 billion. That was well above analysts' estimates of 21 cents per share on revenue of $39 billion, Reuters reported.
Strong performance at its large energy operations offset declines at the company's GE Capital finance and NBC Universal units, where most of the losses occurred. The giant conglomerate said its order backlog for sales of electricity-producing turbines, jet engines and other heavy equipment held steady at $171 billion. GE also maintained that its finance arm was still on track for a profitable year.
Since GE is viewed as an economic barometer due to the size and breadth of its operations, some investors think the 36% drop in profit could be a sign that the current recession is approaching the bottom.
"The numbers are showing stabilization in the global economy and in the performance of GE stock," Jim Hardesty, president of Hardesty Capital Management, which owns GE shares, told Reuters. "The result still wasn't good, though."
The company slashed its quarterly dividend to 10 cents in February, the first time in history that the dividend has been reduced. GE then had its top-level triple-A credit rating downgraded in March.
Even though its shares are now trading at more than double their 52-week low of $5.86 on March 4, those who think GE now appears to be on the comeback trail may find a long road ahead.
"It's not going to double again from here," Edward Maraccini, portfolio manager at Optique Capital Management in Milwaukee, told Reuters. "But as long as we see stabilization in results...it can definitely start to build off a base."
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