Is It Safe? GE's Down But Not Out

General Electric(GE Quote) has fallen 73% in a year. Does that share-price drop represent the buying opportunity of a lifetime or a bellwether for the eventual collapse of one of the biggest companies in the world?

It's hard to imagine a world without GE. From appliances to light bulbs to airplane engines, General Electric's products can be found everywhere. But conglomerates, such as GE and Tyco(TYC Quote), tend to trade at a discount to the sum of their parts. It's almost like owning a mutual fund, management fees and all. Some investors argue it's better to purchase shares of companies operating in single industries.

With GE, an investor gets more than just the present value of future cash flows from businesses it owns. There is also the security of a strong balance sheet.

But that safety was called into question after Standard & Poor's downgraded GE one notch from its highest rating of "AAA," which the company had held since 1974, to "AA." The result is an increase in debt costs.

The company's diversification, which helps spread risk, hurt GE this time around. GE Capital, its financing arm, has been caught up in the credit crisis. GE's sterling credit rating had allowed the division to expand profits with dirt-cheap financing, making it a cash cow in boom times. With the ratings downgrade, the availability of inexpensive funding will disappear.

The spread between "AA"-rated 5-year corporate bonds over "AAA"-rated debt is 81 basis points. If GE had to refinance its $330 billion in debt today, its after-tax borrowing costs would increase from 4.57% to 5.34%, translating into additional annual expenses of $2.5 billion, or about 25 cents a share. Of course, that debt wouldn't have to be rolled over at once.