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GE bulls vs. bears

Is General Electric stock a value or a bad bet? Two top analysts face off.

By Scott Cendrowski, reporter
February 24, 2009: 12:25 PM ET

NEW YORK (Fortune) -- When Warren Buffett invested $3 billion in General Electric last fall, some thought the move would calm the blue chip's jittery creditors and investors. It hasn't.

Shares are down more than 50% since then, and worries about a downgrade of GE's AAA debt have forced CEO Jeff Immelt to assure investors - half of which are individuals and employees - that he won't cut the 31-cent quarterly dividend, which gives the stock a 10% yield.

As GE trades in and out of single digits for the first time since 1995, is the stock a value or should you shun it? Two top analysts share their views.

Steve Tusa, JPMorgan analyst

The bearish view: We think those are the final steps towards the company's realization that it's too big and complex to manage the way they have been. The logical move is to undergo a dramatic restructuring.

The biggest issue is GE Capital. GE is planning for potential losses of $5 billion in consumer loans, but this is only about 7% of total assets. There's another 93% of asset base that GE is not writing down as aggressively - for example, GE's $300 billion of commercial assets, which include real estate, aircraft financing and energy financing, among other areas.

You haven't yet seen the bankruptcy cycle in corporate America. Everything's been focused on the consumer. But GE is a bigger player in that business than they are with the U.S. consumer. That's why GE Capital's earnings base has held up so well until now. Street estimates do not reflect how bad the commercial credit cycle is going to get by the end of 2009.

GE does have solid assets and people. But analysts' forward earnings estimates have been reduced every year since 2001. The initial 2009 estimate in January 2008 was $2.75 earnings per share and the current consensus is now around $1.20.

Strategically, Jeff and the board have made some smart moves, but before this year they weren't proactive enough in getting away from financial services. That's now the biggest hole in the business. We're cautious about GE (GE, Fortune 500) stock - earnings don't support upside, and it could go lower.

Scott Davis, Morgan Stanley analyst

The bullish view: Contrary to popular belief, we think a dividend cut at GE would be well received by the market. No one's buying the stock for a 10% yield.

The stock recently rallied 15% the day a GE press release said it was going to revisit its dividend policy next quarter, which is code for, "We're going to cut the dividend."

You buy GE for growth. Retail investors have two choices: own stock that has 10% yield and never grows. Or own one that cuts it to a more realistic level and grows in the next few years.

I think it will lose the AAA rating, and that won't be a big blow: GE doesn't get credit for it right now anyway. AAA is more of a vanity rating than a practical rating. Its last bond offering was priced a couple weeks ago around a single A+.

In the last down cycle GE's industrial businesses declined only modestly. We forecast profits to drop by 22% in this recession. By comparison, the average industrial company's will fall by 50%. The reason it holds up strongly is that its key businesses - like power generation, medical devices and aircraft engines - are less cyclical and generate a lot of cash.

As we see it, the stock has a 20% downside and a 100% upside. That keeps us bullish. To top of page


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