A Contrarian View on GE’s Future

06/13/2007 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, chairman and CEO of Schaeffer’s Investment Research, takes issue with a recent magazine cover story singing the praises of General Electric.

After a brief history of the company, and a few platitudes about how much the company is loved outside the US, [a June 4th Barron’s cover story, “GE’s Moment,”] finally gets down to the heart of the matter on General Electric (NYSE: GE).

Citing "explosive growth" in emerging markets, the article notes that GE's revenue could be sharply higher in the coming years. As such, the author speculates that the shares could surge as high as $50, some 30% above their current perch. (GE closed Tuesday at around $37—Editor.)

On the earnings front, GE expects earnings per share of $2.18 to $2.23 this year, while the Street is looking for profits of $2.49 for 2008 and $2.80 for 2009. However, GE's [chief executive officer Jeff Immelt] won't comment on guidance, stating instead that "every expectation I would have is that '08 looks like '07," so long as the global economy stays the course.

But not everyone is happy with GE. The company's shares have been mired in a sideways trend for much of the past several years (GE has not strayed outside the bounds of the $33 to $37.50 region on a monthly closing basis since August 2004), and some analysts are calling for a break-up of the firm.

A Citigroup analyst outlined a partial break-up of GE, in which its NBC Universal division, the GE Money unit, and the company's real-estate businesses could be spun off. Such action, he argued, theoretically would value GE at $45 per share.

[But] even with the analyst "concerns" weighing in at the end of the article, the overall tone of this piece is heavily weighted toward the bullish end of the spectrum. The article plays down GE's technical doldrums, devoting only a couple of sentences to the phenomenon, while choosing instead to focus on the great earnings potential, higher price targets, and potential break-up [value] of the firm.

At one point, the article [refers to] "Wall Street's Gloomy View Notwithstanding." I would like to take issue with this "gloomy view" [idea]:  As of this writing, 12 of the 14 analysts covering GE rate the shares "Buy" or better, with the remaining two analysts doling out "holds." In my opinion, two "holds" does not equal “gloom.”

Other indicators also back up the bullish sentiment view toward GE, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.58 ranks below 75% of all those taken during the past year. Meanwhile, about 0.5% of the stock's float is sold short, indicating that short sellers have almost no interest in GE.

Currently, it seems that the shares are riding the blue-chip wave, staying afloat by sheer will of the blue-chip investor. With GE increasingly dependent on emerging markets in China and the like, the stock could be in for a rough go should the global-market situation change.

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