Thursday, March 18, 2010

"A Longtime GE Bear Stops Growling" "General Electric's Valuation May Get a Boost" (GE)

The stock is up four cents at $18.08 in pre-market trade.
From Barron's (Hot Research):

Sterne Agee upgraded the industrial giant to Neutral from Sell.


WE RAISED OUR RATING on General Electric (ticker: GE) to Neutral from Sell to reflect investor-focus shift to "normalized" 2012 earnings per share.

As GE's management increasingly discusses its aspirational objectives to eventually increase capital returns to investors (perhaps beginning in 2011) and focus on "normalized" EPS of potentially $1.40-$1.50 (perhaps by 2012), we sense GE's valuation is likely to look beyond transitional flat EPS in 2010 and moderately improved EPS in 2011 to value GE in the context of its potential earnings power once the company's financial-services business has rebuilt its loss reserves and can begin to operate in a less capital-constrained environment, perhaps under a more narrowly defined captive finance role.

Despite our rating upgrade, we continue to believe improvement in GE's fundamentals is not imminent. Rising surplus liquidity (excluding prefunding of anticipated debt maturities at GE Capital Solutions) from cash from operating activities and further asset sales (NBC Universal/ Comcast (CMCSA)) joint venture and possible additional sales of GE "classic" industrials), as well as further narrowing of GE Capital Solutions' core focus and reduction in the size of its asset portfolio, may encourage investors to value GE based increasingly on "normalized" level of earnings, particularly since the Federal Reserve has reaffirmed its intention to leave interest rates unchanged at very low levels.

Our new near-term price target for GE is $21. Our new price target assumes GE shares can begin to trade off of "normalized" EPS of perhaps $1.40-$1.50 beginning about 2012 and trade closer to its 10-year average following fiscal year absolute average price/earnings multiple of 14.6 times, or approximately $21 per share.

We previously assumed GE would trade at a 10% P/E discount to its projected 2009-2011 estimated average EPS of $1.03, or $15 per share. We would note that our new valuation represents an "inflection point" and could be unmet depending on evolving financial regulatory reform requirements that could necessitate GE Capital Solutions capitalization changes.

-- Nicholas P. Heymann
-- Lawrence T. De Maria
-- Ben Elias
-- Samuel H. Eisner

A Longtime GE Bear Stops Growling

General Electric(GE) has had a nice run of late, which I am happy to say I called in this article, but an analyst upgrade Wednesday afternoon truly caught me off guard and appears to be an unusually bullish sign for the stock.

The upgrade to 'neutral' from 'sell' came from Nick Heymann, analyst at Sterne Agee and a former GE executive who has been following the company for more than 20 years. Heymann has been a constant GE skeptic during the past year or so that I've been following the company. He has repeatedly argued GE has a massive capital hole that needs plugging -- far larger than anything the company has been willing to acknowledge.

Heymann has also said GE will need to sell several businesses or else do a massively dilutive equity raise at some point, despite GE executives' insistence that they could mostly earn their way out of their troubles.

Heymann still sounds pretty bearish, stating in his report that he still thinks an "improvement in GE's fundamentals is not imminent." He also believes GE may still end up selling several businesses, and that it's vulnerable to potential regulatory changes, such as the government requiring a greater capital cushion for its financial unit.

However, in raising his price target to $21, Heymann argues investors have changed the way they are valuing GE, focusing on potential earnings power after GE's struggling financial services unit has built up additional reserves. That would lead to a "normalized" earnings of $1.40-$1.50 per share starting in about 2012, Heymann writes. Analysts expect GE to earn 99 cents this year.

Though the Heymann report came out before the close Wednesday, it did not appear to get much attention as the stock fell steadily throughout the afternoon. I'd expect it to open strong on Thursday. Heymann knows GE and pulls no punches. If he's turning bullish -- or less bearish -- it may be the most positive sign I've seen in some time for the stock.

--Written by Dan Freed in New York.