By Nick Zieminski - Analysis
NEW YORK (Reuters) - Ask 10 people what General Electric Co (GE.N) shares are worth and you are liable to hear 10 different answers.
Now that Standard & Poor’s has stripped GE of its AAA credit rating and switched its outlook to “stable,” some of the uncertainty surrounding the huge U.S. conglomerate has been lifted and the stock rallied amid relief S&P’s cut was not deeper.
But while some investors think GE stock could double from here, others warn that the company is not out of the woods yet. Among the many questions still on the table are the scope of writeoffs at its finance arm, the need for any additional funding, and the health of its industrial backlog.
GE -- the largest U.S. conglomerate -- will attempt to answer some of those questions at a crucial analyst meeting next Thursday, in which it is expected to spell out details about its balance sheet, including fresh data on likely credit losses.
“Once they can provide a little more transparency into GE Capital, I think that stock will head back up toward $20,” said Ted Parrish, principal at Henssler Financial Group in Kennesaw, Georgia, which owns GE shares. “It’s been beaten up a little too much.”
GE last traded above $20 in early November. The stock has lost three-quarters of its value from its 52-week high of $38.52 in April, as investors focused on the potential landmines in its capital unit, overlooking the relatively upbeat prospects for its huge industrial units.
“With all the eyes on GE Capital, there is a decent story being lost,” said analyst Daniel Holland of Morningstar, who has a five-star rating on the stock, estimating GE’s fair value at $22.
Holland said GE could help restore confidence in its long-term prospects with targeted industrial acquisitions, to shift the emphasis back to its core business.
“It would give a lot of investors confidence GE can fight many battles and is positioning itself for growth,” Holland said.
A key question ahead of next week’s analyst meeting is the extent to which GE Capital can be profitable this year.
Deutsche Bank analyst Nigel Coe said on Thursday GE could revise down its earlier target, which calls for $5 billion operating profit at the finance arm. Coe, who has a “hold” rating on GE shares and a $12 price target, estimates earnings of $2.9 billion at the finance unit.
Citi analyst Jeffrey Sprague estimates GE shares are worth $9, reflecting the value of its industrial portfolio; the capital arm is worth zero, according to Citi.
“The S&P ratings downgrade removes another overhang, but we still have concerns about escalating credit losses and more downside risk to industrial earnings,” Sprague wrote in a note to clients. “It’s likely Moody’s will also weigh in shortly and may provide a more pessimistic view.”
Profit fell 29 percent at GE Capital last year and was the main drag on the company’s overall results, which were down 22 percent. Still, even with that decline, GE Capital earned $8.63 billion -- more than even GE’s Technology Infrastructure division, which makes jet engines and CT-scan machines.
The high potential profitability of the finance unit goes a long way toward explaining why it became such a large part of GE, growing dramatically during the tenure of prior Chief Executive Jack Welch.
Current CEO Jeff Immelt wants to reduce GE’s reliance on that business, cutting it to account for 30 percent of GE’s profit, down from half in 2007, before the downturn started in earnest.
S&P said it expects no earnings and no cash flow for GE Capital this year or next year, but its stable outlook reflected an “excellent” risk profile.
“That would be one of the reasons we would look at their outlook, if GE Capital was going to report significant losses for a significant time,” S&P analyst Robert Schulz told Reuters in an interview. “That is not our current expectation.”
Additional reporting by Scott Malone and Walden Siew in New York, Nick Carey in Chicago; editing by Patrick Fitzgibbons and Matthew Lewis