FOLLOW UP

It's Time to Buy General Electric

A return to topics discussed in earlier issues.

GENERAL ELECTRIC'S FINANCIAL PERFORMANCE CONTINUES to disappoint, with the conglomerate reducing earnings guidance last week for the second time this year. At 25, however, its shares look cheap enough to buy.

GE's "operations have improved since 2000, but there has been a dramatic contraction of valuation," says Jack De Gan, chief investment officer at Harbor Advisory in Portsmouth, N.H.

Revenue per share has grown to $19, up from $13 in 2000; cash flow per share has popped up to $3.30 from $2 in 2000; earnings per share is $2, up from $1.29, and dividends per share are $1.25, up from 57 cents. Yet the stock is 50% lower.

If GE can net $2.50 in 2010 and attract an earnings multiple of 15, the shares could return to $37.50, reasons De Gan. Granted, Barron's has overestimated the stock's attractions in the past ("GE's Moment," June 4, 2007), but it's tough to see GE trading much below a current 12.5 times estimated earnings.

General Electric cut its third-quarter forecast last week to a range of 43 cents to 48 cents a share, down from 50 cents to 54 cents. It also revised full-year targets to $1.95 to $2.10 a share, from $2.20 to $2.30. Before the company began lowering expectations, analysts thought GE could earn $2.43.

In its new guidance, GE assumes the finance business will see a 10% to 30% drop in earnings, while the industrial businesses will grow 10% or more next year. Finance earnings will come down as the company reduces leverage, sees fewer gains from asset sales and adds to its provision for credit-card write-offs. Also, GE could suffer some mark-to-market losses in its "securities for sale portfolio."

Given the financial tumult of recent weeks, investors understandably are scared about losses that might lurk within GE Capital. Bear in mind, however, that the unit enjoys some advantages over commercial and investment banks. For one, most of its loans are underwritten internally and held to maturity, so they don't get marked to market. Also, GE's leverage is only about 7.2 times assets, well below many financial concerns.

GE has maintained its triple-A rating and reinforced it by numerous moves last week. "They have access to capital and capital is in scarce supply," says James Medvedeff, a senior analyst at Evergreen Investment Management, which owns the shares. When the market stablizes, GE Capital should remain a giant in its industry, with fewer, weaker competitors.