Monday, November 3, 2008

Marcial: Could GE Be a Cheap Global-Comeback Play?

Marcial: Could GE Be a Cheap Global-Comeback Play?

General Electric (GE) has come to symbolize the jarring impact of the swift deterioration of the global financial system and darkening economic outlook. Shares of the once-mighty Wall Street kingpin have tumbled to multiyear lows, as analysts have grown impatient with the giant industrial and media conglomerate's turtle-paced growth. There is also a fair amount of anxiety about the health of GE's finance operations. These factors have prompted many of its Wall Street followers to downgrade the stock and scale back their earnings and sales forecasts for 2008, 2009, and 2010.

But the nasty drubbing that GE has suffered—which took its stock price from a high of 42 a share on Oct. 31, 2007, to an 11-year low of 17.83 on Oct. 24—may now have moved its besieged shares from the "unwanted" stock category to the "bargain" bin. The shares may not only be luring buyers because of GE's depressed p-e ratio, but also because of what CEO Jeffrey Immelt and his management team have been doing to improve the company's liquidity, partly by repositioning its finance portfolio and restructuring the company.

"We remain upbeat over the long-term outlook beyond the difficulties in the current year," says Stephen O'Neill, an analyst at investment firm Hilliard-Lyons (it has done banking for GE). O'Neill is a bull on the stock with a 12-month target of 25 a share. He notes that in spite of being "blindsided" in the first quarter—following the problems in the domestic housing market and the shock caused by the Bear Stearns insolvency—GE managed to meet its second-quarter earnings guidance. Unfortunately, more of the same financial difficulties impacted the third quarter, resulting in analysts' downward revision of their earnings expectations for 2008 and 2009, he notes.

how the bulls see it

The stock, which traded at 19 on Oct. 31, is trading at depresssed 1997 levels, although it had more than doubled earnings since that time, significantly improving its business portfolio. Over the last seven years, GE sold its life insurance, mortgage insurance, bond insurance, reinsurance, and materials businesses. For a while, rumors swirled that GE might also unload NBC. But Immelt publicly said it would hold on to the media-TV leader.

At its current price, GE is trading at about 9.6 times 2009 estimates. The last time it traded at that p-e was in 1982. GE's price-earnings multiple was as high as 50 in 1999.

With the problems at GE Capital, which offers credit facilities and loans to customers, how do the bulls expect GE to come out a winner?

Here is how O'Neill sees it: GE's infrastructure unit appears poised for sustained long-term growth. The large energy unit is positioned to benefit from strong global demand for energy production, and for alternatives to fossil fuel generation, in light of concerns over global warming. Its aviation and rail businesses are experiencing strong shipments. Newer areas of business, such as wind power, are likely entering a growth phase.

Other growth platforms such as water, security, digital media, and health-care info tech are being developed. And the company is making progress in turning around its NBC and health-care operations.

short-term liquidity problems licked

Meanwhile, GE has taken several steps to strengthen its capital and liquidity position. It raised $15 billion in cash, including the sale of $3 billion in preferred stock to Warren Buffett's Berkshire Hathaway (BRKA). GE is also benefiting from some of the government's rescue programs.

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