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GE Bull Still Sees Soft First Quarter

Morgan Stanley likes where General Electric is going but, at least as the far as the first quarter is concerned, it thinks the company is not quite there yet.



) -- Morgan Stanley likes where

General Electric

(GE) - Get General Electric Company Report

is going but, at least as the far as the first quarter is concerned, it thinks the company is not quite there yet.

"The outlook for GE is improving as order rates continue to strengthen and GECS

GE Capital concerns appear increasingly manageable," Morgan Stanley said in a research note on Monday. "1Q10 will likely be another soft quarter however, as loss from Olympics, softness in late cycle businesses and increasing GECS provisioning keep pressure on earnings."

Overall, Morgan Stanley is bullish on GE, with an overweight rating and $20 price target on the stock. It's expecting a profit of 16 cents a share when the company reports its quarterly results on April 16, in line with the current average estimate of analysts polled by

Thomson Reuters

, but down from GE's profit of 26 cents a share in last year's first quarter.

The firm notes the tough comparison with the performance a year ago when results were boosted by one-time gains in the company's Aviation and GE Capital businesses, and says particular drags on results for the three months ended in March will be weak gas and wind turbine shipments and an estimated loss of $230 million on the Olympics.

On the plus side, the first quarter is expected to be an inflection point of sorts, when impairments from GE Capital finally bottom out and softness in certain late-cycle Industrial businesses begins to alleviate. Morgan Stanley tweaked higher its estimates for sales growth for the first quarter and the year, going to negative 5% from negative 6% and down 1% to flat, respectively, and noted that market perception of the company appears to be shifting to the positive.

"Stock has been one of the most unloved in the space by the buy-side but we are starting to see core investors get back into the name for the first time in several years," the firm said. "This is a change at the margin from last quarter when the stock traded with a 'complexity discount.'"

The jump in GE shares since the start of March backs this up as the stock as rallied from below $16 to nearly touching $19 in intraday action on March 24. With the stock up 21% year-to-date, a setback in the first quarter could prompt a

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round of profit-taking


In keeping with its optimistic long-term outlook, Morgan Stanley expects to see order rates to continue to improve for GE on a sequential basis in the first quarter, and it's anticipating cash flow from the company's Industrial businesses, which includes the Energy and Technology Infrastructure units, will remain strong. GE itself has forecast Industrial cash flow from operating activities will come in between $13 billion and $15 billion for 2010.

Perhaps the most heartening news for GE shareholders is that Morgan Stanley believes the idea that the company is severely under-reserved for potential losses in the Capital Finance unit has dissipated.

"Within GECS, we maintain our estimates that GECS is ~ $20 billion under reserved and believe bear-case estimates of $40 billion-plus is pretty much off the table," the firm said. "CRE

commercial real estate exposure remains the key risk -- CRE prices have stabilized and are starting to rise and our MS REIT team believes their bull case is playing out - NCOs

net charge-offs likely peaked in 1Q."

Morgan Stanley has estimated the Capital Finance unit was between $15 billion and $20 billion under-reserved for the past 15 months, and it says the company's own estimate of $13 billion to $19 billion seems realistic as well.

Breaking through $20, a level the stock hasn't seen since mid-October 2008, is the next milestone for the stock, and Morgan Stanley thinks fundamental improvement in the results will be required.


the stock to move materially over $20,we would have to see multiple expansion for Industrial business (not impossible because of higher asset quality) and improving asset performance/lower legislative risk on the GE Capital side," it said.

GE shares finished up 20 cents, or 1.1%, at $18.53. Volume of 55.8 million was below the issue's trailing three-month average of 82.9 million.


Written by Michael Baron in New York