GE 3Q profit rises 18 percent (AP)

NEW YORK – General Electric Co. said Friday that a surge in its lending business lifted its profit 18 percent in the third quarter, but its stock price fell on concerns about weak contributions from its manufacturing businesses.

GE is a barometer of the economy because it reaches so many industries. It builds everything from jet engines to refrigerators, and its GE Capital lending arm is involved in a variety of businesses including credit cards and real estate.

The company's industrial orders grew 16 percent in the quarter and it has a record backlog of them. However, many of those orders came more than a year ago, and the cost of raw materials and other expenses have risen since. That could erode profits.

"Prices have gone up," said Peter Sorrentino with Huntington Asset Advisors. "It keeps them from hitting" profit targets.

Shares fell 32 cents, or 1.9 percent, to close at $16.31.

The industrial and financial giant reported net income of $2.34 billion, or 22 cents per share, for the three-month period ended Sept. 30. That compared with $1.98 billion, or 18 cents per share, a year earlier. Revenue was flat at $35.4 billion.

Among GE's other businesses, aviation profit increased 7 percent to $862 million, health care grew 5 percent to $608 million and transportation increased 94 percent to $196 million. But profit declined 9 percent to $1.5 billion at its energy infrastructure business.

Meanwhile, GE's lending business is fueling earnings.

The company's overall profit has increased for four straight quarters as falling interest rates sparked a rebound at its GE Capital lending business. Airlines, railroads and other major industries have been taking out more loans for new equipment. Consumer lending is up.

The results are a big improvement from three years ago, when GE booked more than a billion dollars in charges and write downs as it quit the subprime lending market.

With its lending business increasingly healthy, GE decided in September to buy back preferred shares from Warren Buffett's Berkshire Hathaway Inc. for $3.3 billion. Buffett's investment in GE stabilized the company's finances during the U.S. financial meltdown in October 2008.

Still, analysts said, investors remain concerned GE's dependence on its financing side. Nearly a third of GE Capital's portfolio comes from loans in Europe, where a banking crisis may force the company to deal with an increasing number of delayed payments and defaults.

GE says its manufacturing side will generate a larger share of company profits in the future. The company said its industrial businesses should take home bigger profits from the revenue it generates later this year. Operating income also should rise in 2012.

Immelt said he thinks China, Brazil and other developing nations will continue to buy GE equipment and services as their expanding economies require more trains, planes, power plants and factories. The European credit crisis also appears to be a "manageable" situation for the company's lending operation, he said.

Excluding the large dividend payout to Berkshire Hathaway, GE's profit was $3.22 billion or 31 cents per share, matching Wall Street expectations.

Other large industrial companies have announced mixed results. Earlier in the week, United Technologies, which makes jet engines, elevators and other aerospace and building systems components, said third-quarter profits rose 11 percent to $1.32 billion while Danaher reported a 19 percent decline to $523.4 million.

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Chris Kahn can be reached at http://twitter.com/ChrisKahnAP

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Capital One posts 3rd-qtr profit edges up 1 pct (AP)

NEW YORK – Capital One Financial Corp. on Thursday said its third-quarter profit edged up 1 percent, as it wrote more auto and commercial loans and defaults eased.

A spike in marketing and operating expenses and an increase in a reserve set aside to handle claims against the bank related to soured mortgages tempered the gains.

The McLean, Va.-based bank had net income for the quarter ended Sept. 30 of $813 million, or $1.77 per share, compared with $803 million, or $1.76 per share, in the year-ago period.

Total revenue rose 3 percent to $4.15 billion, from $4.02 billion last year.

Analysts, on average, were expecting profit of $1.68 per share on revenue of $4.04 billion, according to data provided by FactSet.

Net interest income, or money earned from deposits and loans, rose 6 percent to $3.28 billion, from $3.11 billion a year ago. Total deposits jumped nearly 8 percent to $128.32 billion. Total loans gained 3 percent to $129.95 billion.

"Overall, I think the results were pretty good," said Keefe, Bruyette & Woods analyst Sanjay Sakhrani.

The bank, best known for its ubiquitous "What's in your wallet?" advertising campaign, said U.S. credit card use rose 17 percent from the prior-year quarter. Sakhrani said the increased usage was "very strong."

Its auto finance unit wrote 40 percent more loans than last year, bringing total loans in this segment to $20.42 billion. Commercial loans also increased, rising 9 percent to $32.11 billion. CEO Richard Fairbank said during a conference call to discuss results that the growth in commercial loan commitments, which indicates future loan growth, was "even stronger."

"We believe the period of shrinking loans through the Great Recession has come to an end," Fairbank said.

Capital One wrote off $812 million in uncollectible loans, a drop of 47 percent from last year. That enabled the bank to reduce the amount it set aside to cover soured loans by 28 percent, to $622 million.

Fairbank said improvements in the performance of the bank's credit card and auto loans "have outpaced the modest and fragile economic recovery." The bank has been monitoring its outstanding credit in search of signs that recent economic difficulties will lead to another round of worsening payment performance, but said so far "we have yet to see any evidence of this."

The gains in lending were partially offset by higher marketing and operating expenses, which rose 15 percent.

Capital One also said it increased its reserve for mortgage-related claims by 3 percent to $892 million. The bank said it now believes the upper end of potential losses from such claims, which stem from mortgages that were used to back investment vehicles that have since soured, could be $1.5 billion.

The company said the pending acquisition of HSBC's U.S. credit card portfolio should close by the end of the year, pending regulatory approval. It is also still waiting for regulators to OK its purchase of ING Direct.

Capital One shares added 74 cents, or 2 percent, to close Thursday trading at $40.49. Shares rose 11 cents to $40.60 in aftermarket trading.

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Feeble Windows holds back Microsoft profit (Reuters)

SEATTLE (Reuters) – Microsoft Corp's flagship operating system made only slight gains last quarter, largely due to business and emerging market spending, holding back profit growth for the world's largest software company.

Sales of Windows, which still runs more than 90 percent of the world's personal computers, edged up only 2 percent from the year-ago quarter, in line with limp PC sales across the board.

That broke the streak of three straight quarters of declines, but it fell short of some analysts' hopes.

"We still had Windows miss again, although not by nearly as much as it has the last couple quarters," said Brendan Barnicle, an analyst at Pacific Crest Securities.

Sales of Windows 7, Microsoft's latest system, have leveled off after a big launch in 2009. Growth is now dependent on Microsoft's core business customers, which are still spending on technology despite the slow economy.

In contrast, hard-up consumers are waiting for next year's Windows 8, putting off purchases indefinitely, or opting to buy Apple Inc iPads instead.

Microsoft Chief Financial Officer Peter Klein said the cycle of businesses buying new PCs to replace aging machines was still in the "middle innings," offering hope of continuing modest growth.

"We expect that dynamic of business PCs growing faster (than consumer) to last throughout this fiscal year at least," Klein said on a conference call with analysts.

Microsoft's shares, which have traded in the $20-$30 range for the last decade, fell 0.7 percent in after-hours trading, to $26.85. They closed at $27.04 on Nasdaq.

BING LOSS NARROWS

The brightest spot for the world's largest software company was an indication that its perennially money-losing online services unit -- including the MSN Internet portal and Bing search engine -- may have turned a corner.

The unit lost $494 million in the quarter, the lowest loss in the last seven quarters, slowing the flood of red ink that has cost Microsoft more than $5 billion since it launched Bing in mid-2009, as it invests heavily to catch up with Google Inc.

Microsoft made no new statements about Yahoo, which is up for sale. Reuters and the Wall Street Journal have reported that Microsoft may work with private equity firms in putting together a bid for the ailing Internet giant, which it tried and failed to buy outright in 2008.

CFO Klein sidestepped an analyst's question on whether a sale of Yahoo might interfere with Microsoft's search engine cooperation with the company, which has yet to yield the expected profits.

"This is a long-term alliance," said Klein. "They're super-focused on what we need to do. And no matter what, that's the goal at hand."

NO BEAT

The Redmond, Washington company reported fiscal first-quarter net profit up 6 percent to $5.74 billion, or 68 cents per share, compared with $5.41 billion, or 62 cents per share, a year ago.

That met Wall Street's average estimate, according to Thomson Reuters I/B/E/S. It is the first time in 10 quarters that Microsoft has not exceeded the average estimate.

"They were just in line on EPS, which typically Microsoft beats," said Barnicle. "Q1 is seasonally not a big quarter for Microsoft, and this was no exception."

Overall sales rose 7 percent to $17.37 billion, helped by Office, which remains popular with businesses even in the difficult global economy.

The Office unit posted an 8 percent gain in sales to $5.6 billion, making it Microsoft's biggest-selling and most profitable unit.

The server and tools unit, which sells the server software behind the datacenters enabling "cloud" or Internet-based computing, rose 10 percent to $4.2 billion, but even that fell short of some analysts' expectations for the fast-growing area of the technology market.

The entertainment and devices unit posted a 9 percent gain in sales, helped by the Xbox, which remains the most popular game console in the United States.

MORE CASH OFFSHORE

Microsoft said its $8.5 billion deal to buy online chat service Skype, which closed last week, would add about $600 million to expenses this fiscal year. The company now estimates costs of $28.6 billion to $29.2 billion for fiscal 2012, which started July 1.

Microsoft has a cash hoard of $57.4 billion, with $51 billion of that -- or 89 percent -- parked overseas. The company is increasing its overseas cash aggressively. Three months ago, Microsoft said it had $52.8 billion in total cash, with only $45 billion -- or 85 percent -- overseas.

Faster-growing rival Apple on Tuesday reported it has $81 billion in cash.

(Additional reporting by Lisa Richwine in Los Angeles; Editing by Richard Chang and Matthew Lewis)

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Safeway 3Q profit climbs on improved revenue (AP)

PORTLAND, Ore. – Safeway Inc. says it coming up with new answers as it finds itself facing the same economic challenges that have plagued the grocery industry for years.

It's a tough time for the grocers: shoppers are still carefully watching what they spend, food prices continue to rise and competition is intensifying. The chains that are succeeding have found new ways to do so.

Safeway did not increase its sales volume during its most recent quarter and it saw fewer shoppers in its stores.

But the company managed to increase its fiscal third-quarter profit as it increased its sales of private-label products and relied more on gasoline sales to drive its revenue. It also has also put a heavy emphasis on reducing product loss, due to breakage, theft or other means, to control costs and improve its profitability.

"I think that it's a good assumption, the economy is not going to get materially better and then you've got to play in that environment and utilize the things that you have uniquely developed to win with," Safeway's CEO Steve Burd told investors Thursday. "And, you know, we wish our sales progress was much faster, but we love the fact that it's steady."

Safeway, based in Pleasanton, Calif., reported that its net income rose to $130.2 million, or 38 cents per share, for the period that ended Sept. 10, up from $122.8 million, or 33 cents per share, a year ago.

Revenue climbed 7 percent to $10.06 billion, largely on increased fuel sales and improved sales at established stores.

The results topped analysts' average expectations for earnings of 35 cents per share on revenue of $9.85 billion, according to a survey by FactSet.

Safeway's shares rose in morning trading on the news, but dropped later in the day as investors got a bigger, and not necessarily brighter, picture of the quarter and what lies ahead.

Safeway, like all grocers, has been struggling with higher food prices. While the company has passed along most of these price increases, this has continued to dampen the supermarket's performance.

Its gross margin fell to 27 percent from 28.1 percent in the third quarter. Fuel sales caused a 0.88 percentage point drop, and the cost of goods sold rose 8.8 percent.

While traffic was down in its stores as shoppers consolidated their trips, they spent more due to higher prices.

Safeway, which operates Von's, Dominicks, Safeway and other grocery chains, reported that revenue at stores open at least a year increased 1.5 percent, when excluding fuel. This figure is a key gauge of a retailer's health because it excludes results from recently opened or closed stores.

The company did manage to maintain its market share during the period, its first time in several quarters to do so.

Safeway does face increasing competition as Wal-Mart Stores Inc., which relies heavily on its low prices to attract shoppers, reported Wednesday that it plans to aggressively open more stores in the U.S.

But Safeway leaders were not concerned about the threat from the world's largest retailer, saying price alone has not won shoppers over to date. Safeway has managed to build a loyal customer base on a mix of environment and competitive prices that it thinks it can maintain.

It's still a split economy among shoppers, Burd said. Those that are financially comfortable are buying flowers, nicer wine and the products they had prior to the recession. The majority of shoppers — about 75 percent — are still carefully watching what they buy, switching products or trading down to keep their costs under control as they feel the pressure of higher gas prices, high unemployment and general economic unease in their lives.

"I think that's been true for probably more than two years now," Burd said. "And I don't expect it's going to change in the next 12 months."

Safeway expects sales momentum to pick up in the second-half of the year but stood by its full-year earnings guidance of $1.45 and $1.65 per share and revenue at stores open at least a year to be up about 1 percent when removing fuel.

Analysts predict full-year earnings of $1.66 per share.

Safeway, which runs 1,681 stores in the United States and Canada, has seen its stock price fall 16 percent over the past year, as of Wednesday's close at $17.97. The company's shares jumped in morning trading but fell 18 cents to $17.80 in afternoon trading.

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AP Business Writer Michelle Chapman contributed to this report from New York.

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Analysis: Wall Street banks profit from their weakness (Reuters)

NEW YORK (Reuters) – The tempestuous bond markets of the third quarter could result in surprising gains for U.S. banks, but investors are unlikely to be impressed.

JPMorgan Chase & Co (JPM.N) said on Thursday that about one-fourth of its profit in the quarter resulted from an accounting oddity known as debt valuation adjustments, or DVAs. They are paper gains that occur when investors price more risk into a company's bonds, leading to a reduction in liabilities.

Investors, dismayed that so much of JPMorgan's profit came from an accounting quirk rather than cash-generating business, sent the bank's shares 4.8 percent lower. Its Wall Street rivals are likely to report similar results, analysts said.

"We're likely to see these DVA gains across all of the big capital markets players," said Shannon Stemm, a financial stock analyst at Edward Jones.

Before JPMorgan's results, analysts had forecast DVA gains of $1 billion for Morgan Stanley, (MS.N) and $300 million for Goldman Sachs Group Inc (GS.N).

But because the two banks faced more severe bond-market stress than JPMorgan during the third quarter, they may report even larger DVA figures, analysts said. Those gains could be the only profits the two banks have to show for the quarter.

The rule that pertains to DVA, known as FAS 159, is part of rulemakers' efforts to make balance sheets more transparent by forcing companies to record changes in the market values of some assets and liabilities.

But the rules can make a company's financial statements more confusing, too, as when Lehman Brothers recorded a DVA gain of $1.4 billion just days before it filed for bankruptcy.

As the European debt crisis intensified in the third quarter, most U.S. bank debt weakened as investors grew jittery about the exposure of U.S. financial institutions. Morgan Stanley's debt was among the worst performing of the major banks, indicating that it may record the biggest gain, analysts said.

But experts cautioned that forecasting DVAs is difficult, because every bank funds its operations with a different combination of debt, and companies have some leeway for valuing the liabilities, particularly when they trade infrequently.

"It drives me crazy as an analyst," said Jack Kaplan, of Carret Asset Management, which has $1.4 billion in assets under management and holds JPMorgan shares and some Morgan Stanley debt. "It's nearly impossible to predict and you don't know if the rest of the market is factoring it in or not."

HARD TO PREDICT

Morgan Stanley, in particular, has seen enormous paper gains and losses that were difficult to forecast.

The bank reported a DVA gain of $1.4 billion in the third quarter of 2008 as the credit crisis reached its pinnacle, only to post a DVA loss of $6 billion the following period after the U.S. government stepped in with a multibillion-dollar bailout.

Analysts on average are forecasting a profit of 30 cents per share for Morgan Stanley, according to Thomson Reuters I/B/E/S. But it looks as though the only reason analysts see the bank in the black is a big DVA gain they are factoring in.

Half of the 24 analysts who cover Goldman believe the company will report its second loss in 50 quarters as a public company, according to Thomson Reuters I/B/E/S. The average estimate is a profit of 15 cents per share.

The estimates would be lower if not for hundreds of millions of dollars' worth of expected DVA gains.

Of course, none of that means investors or analysts view DVA as a good thing, nor do they equate changes in debt value as the same kind of income banks earn from fees or changes in asset values.

"People consider DVAs accounting noise," said Matthew Morris, director of corporate advisory services in the Dallas office of RGL Forensics. "It's counter to common sense because as the company weakens this is somehow a net positive thing"

(Editing by Dan Wilchins and Steve Orlofsky)

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Carrefour warns on profit as Europeans cut back (Reuters)

PARIS (Reuters) – Carrefour, Europe's biggest retailer, issued its fourth profit warning in as many months on Thursday, adding to signs cash-strapped shoppers are cutting back and increasing doubts about its turnaround plan.

The French group, battling to reverse years of underperformance in its main western European markets, said it expected 2011 operating profit to fall by up to 20 percent, compared with about 15 percent previously.

Its shares, already down around 40 percent this year, were off 5 percent by 1025 GMT.

The warning, coming after several strategy U-turns, is a fresh blow to the credibility of chief executive Lars Olofsson, who so far has retained the backing of the group's powerful top shareholder Blue Capital -- an alliance between French luxury tycoon Bernard Arnault and U.S. investor Colony Capital.

A Blue capital spokesman would not comment on recent speculation that Olofsson may be running out of time.

A source close to the matter said the alliance understood the turnaround, notably in France, could not succeed overnight.

In a call with analysts, new finance chief Pierre-Jean Sivignon blamed the warning mainly on worsening trading conditions in Europe, although he also flagged a drop in discretionary spending in China.

European retailers are struggling in their home markets as shoppers are hit by higher prices, subdued wage growth and government austerity measures.

On Wednesday, smaller French retailer Casino also reported slower growth in France but offset that with a strong performance in emerging markets.

Carrefour is suffering more than most because it makes the bulk of its sales in hypermarkets, which are losing out to specialist stores in mature western European markets.

It has also admitted mistakes, such as raising prices in France before rivals such as E Leclerc and Intermarche. In August it announced a new drive to cut prices.

Analysts said the latest warning raised question marks over the chances of a swift recovery next year.

"Despite the significant issues facing the business in France, consensus is forecasting a 17 percent bounce-back in (2012) EBIT (earnings before interest and tax)," Espirito Santo analysts said. "We are more cautious on 5 percent."

FRENCH HYPERMARKET WOES

Carrefour, the world's second-biggest retailer by sales after U.S. group Wal-Mart, said third-quarter sales edged up 0.3 percent to 22.8 billion euros ($31 billion), in line with forecasts as robust growth in Latin America barely offset weak sales in France and western Europe.

Sales at French hypermarkets open at least a year dropped 4.6 percent excluding fuel, deteriorating from a 1.7 percent decline in the second quarter.

That included a 9.6 percent plunge in underlying sales of discretionary non-food goods, highlighting the extent to which shoppers are cutting back on non-essential purchases.

Carrefour, which makes about 40 percent of its sales in France, tied part of the decline to the initial impact of a new action plan it launched that entailed fewer promotions and more longer-term price cuts.

Sivignon told analysts it was taking time for shoppers to "assimilate" the change and that process could take 18 months.

Carrefour reduced its price gap with fierce rival Leclerc by one percentage point in France in the quarter, Sivignon added.

Elsewhere in Europe, austerity and economic uncertainty weighed on consumer sentiment in Spain and Italy, while Belgium confirmed its rebound.

Emerging markets remained sources of growth, with sales in Latin America rising 10.2 percent at constant exchange rates.

But China was disappointing with an 11.2 percent drop in non-food sales, which reflected the effect of inflation on discretionary spending, new regulation prohibiting markdowns and a strong comparable basis, Sivignon said.

JP Morgan Cazenove analysts said the group's performance in countries like China and Brazil was lagging rivals like Tesco and Casino respectively.

Recognizing the challenges for its hypermarkets, Carrefour set out an ambitious plan to reinvent the format last year with new "Carrefour Planet" stores that drop the commitment to sell everything under one roof in favor of a smaller number of specialist areas like fresh food and baby foods.

Carrefour said the roll-out was on track, but did not give an update on the first few stores, which Citi analysts said raised suspicions they were not trading as well as hoped.

"If this is the case, we would see the fact that they are persisting with the rollout as concerning," they said.

($1=0.725 Euros)

(Editing by Mark Potter and Mike Nesbit)

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