A Dual Defense of General Electric (GE)

There are a couple issues around the defense of General Electric Co. (NYSE: GE) this morning.  An analyst note is defending the stock, and CFO Keith Sherin gave an interview early this morning to CNBC addressing all of the rumors that have been passed around Wall Street.  We recently ran what all of the assumptions were, and that is being addressed this week with the stock under so much pressure.

As far as the analyst call, this is a defense of the value in G.E. even if it is not exactly an earth-shattering call.  Deutsche Bank reiterated a HOLD rating.  The analyst  said that GE’s industrial operations are worth $12 or more per share.  That would be twice yesterday’s lows and puts GE Capital as a “negative” value on the books.  Deutsche Bank remains concerned that the company is undercapitalized in the Capital unit.  The note also addresses that concerns will remain until GE releases its stress tests in two weeks.

But CFO Keith Sherin gave an interview to CNBC early this morning, and of course GE owns CNBC via the NBC Universal unit.  The CFO used very strong language and tried to put many market fears to rest.  On the flip-side, Sherin did address that he has been working with the ratings agencies.  He said a downgrade is possible and that a AA rating could replace its beloved AAA status, but he also said they might not be downgraded at all.

In short, GE has come to grips with that risk of the Triple-A rating being cut. He argued there are no situations which would generate a run on the bank that would take away the company’s billions of cash.  This is important because that is what has been part of the speculation on Wall Street lately.

Sherin also said that GE Capital “should be profitable” in the first quarter.  Then he said it “will be profitable.”  Most importantly though, the official line is that the company said that it needs no capital right now.  It feels it can run its business through 2010.  He expects the company will generate $14 billion to $16 billion in cash flow under a stress scenario.

Fears about GE are overdone, according to Sherin.  It is conducting a “deep dive” analysis in the company for March 16.

GE’s stock is indicated lower by about 1% this morning.   The stock was negative, then up, and then negative again.  Frankly, trying to predict the price of GE depends on the way the wind blows.  The long and short of it is that you can make the same argument for a 10% rise or a 10% drop in the stock.

As the saying goes, “One thing you can always count on with the pendulum is that it will swing.”

Jon C. Ogg
March 5, 2009