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General Electric (GE)
GE Capital: Raising Concerns, Sinking Share Price
On Wednesday, investors liquidated their shares of General Electric due to concerns stemming from their financing arm, GE Capital. Its stock fell to a level unseen in 18 years, trading at one point for less than $6 per share. The selling spree began on fears that their AAA rating would be cut sometime in the near future. However, these concerns over their financing unit are nothing new. Since the markets roared into reverse in the last quarter of 2008, investors have been keeping a close watch on GE. At one point, the cost to insure their debt was so high that investors were comparing the costs with AIG's (AIG: Charts, News, Offers) bonds. So, after only a few weeks into the 2009 fiscal year, are investors being too hasty?
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Given current data, it can be argued from both sides. Looking at recent events, GE posted a 44.8 percent drop in Q4 2008 profits and recently, they have decided to cut dividends by 68 percent. Some investors also believe GE Capital is not doing enough to protect itself against bad loans. In comparison to larger banking institutions, they only had $5.3 billion (or 1.4 percent of their receivables) set aside to protect themselves against defaults by the end of 2008. Other banking institutions had up to 2.5 percent set aside. Furthermore, targeting $5 billion in earnings may be nothing more than a lofty goal. In a way, they could be setting themselves up for a rude awakening in the near future. Now look at real estate holdings; the company has written down the value of many of these investments, but there is concern that the values could continue to fall. Because they classify these holdings as "long-term investments," the reluctance to apply mark-to-market accounting could mean they are overvalued.
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The argument on the other side however, is that GE Capital does not operate like a banking institution. For one, they are a secured lender, meaning they can take possession of the assets they finance. This led the company's management team to say it is unfair to compare them to other large banking firms. Regarding the real estate holdings, GE argues that they use "very little leverage" in their real estate investments. They are also denying rumors that they plan to spin off GE Capital, much less needing to raise more equity. It also denied rumors that it will need government bailout funds, a move that would prove tricky given the lack of federal oversight on this financial firm. CFO Keith Sherin has stated that the division will be able to fund themselves all the way through 2010 without needing more capital.
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At the end of the trail, GE will probably not go bankrupt and probably not need government aid. From the management team, CEO Jeffrey Immelt purchased 50,000 shares on Monday to show his confidence in the company. However, do not forget how adamant he was on maintaining dividends, only to reduce them later. Regarding, the industrial unit of the company, it is still intact and the products that it produces are still in demand. This side of the business is expecting $18 billion in profits. Should it need to divert money to its financial division though, the opportunity to buy assets at fire-sale prices will be lost-- and with it, the chance to quickly boost market share. In argument for bearish investors, few people expected Citigroup (C: Charts, News, Offers) to be in the place where they are today, much less the financial sector as a whole. Because bank regulators do not have oversight on GE Capital, their level of transparency is also concerning. For all investors know, there could be a bubble on their balance sheet that could lead the financing unit to certain doom later. At this point though, we can expect shares of GE to go up if they can maintain their rating or down if Moody's (MCO: Charts, News, Offers) feels otherwise. Ultimately, GE will be facing volatility in the short term, a good chance for speculators and day traders to try and make money. Which side to trade (long or short), that will be up to the individual investor to decide.
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