GE Unfazed By Analyst Reversal
Updated to include General Electric's stock reaction, added commentary.
NEW YORK (
) --
General Electric
(GE) - Get Report
was treading water the day after Sterne Agee analyst Nick Heymann, a longtime bear on the company, upgraded his rating to 'neutral' from 'sell'.
The stock did manage to push up 2 cents to $18.06 in recent trades but it has spent most of the session in negative territory. Volume of more than 54 million looked to be slightly below pace with the issue's three-month trailing daily average of 77 million. GE's finish at $18.07 this past Tuesday was its first close above $18 since Dec. 10, 2008, and it came on strong volume of 228 million, a bullish sign. Year-to-date, the shares have now gained about 19% with much of that appreciation coming since their start of March at $15.90.
Heymann, a former General Electric executive who has been following the company for more than 20 years, has been a constant GE skeptic during the past year or so that I've been following the company. He has repeatedly argued General Electric has a massive capital hole that needs plugging -- far larger than anything the company has been willing to acknowledge.
Heymann has also said GE will need to sell several businesses or else do a massively dilutive equity raise at some point, despite GE executives' insistence that they could mostly earn their way out of their troubles.
Heymann remains pretty bearish, stating in his report that he still thinks an "improvement in GE's fundamentals is not imminent." He also believes the company may still end up selling several businesses, and that it's vulnerable to potential regulatory changes, such as the government requiring a greater capital cushion for its financial unit.
However, in raising his price target to $21, Heymann argues that investors have changed the way they are valuing General Electric, focusing on potential earnings power after GE's struggling financial services unit has built up additional reserves. That would lead to a "normalized" earnings of $1.40-$1.50 per share starting in about 2012, Heymann writes. Analysts expect GE to earn 99 cents per share this year, and the current consensus estimate for 2012 stands at $1.56 a share.
In addition to the change in investors' outlook, Heymann notes "improving performance," at several businesses within GE Capital that had been struggling, such as U.K. mortgages. According to research from JPMorgan analysts, that business accounts for $21 billion out of General Electric's total $59 billion in mortgage exposure.
Though the Heymann report came out before the close Wednesday, it did not appear to get much attention as the stock fell steadily throughout the afternoon. It may have contributed to GE's positive open on Thursday, but General Electric generally moves with the broader market, which also opened higher before drifting lower later in the session.
Investors may believe that, given General Electric's strong run in recent days, which I am happy to say I called in
, it no longer makes sense to pile into the stock. Some long-term holders who have suffered through a roughly 50% loss over the past five years, versus just a 3% loss for the S&P 500 over that time, may feel like this is a good time to dump the stock.
And what's one more analyst? As one commentator wrote on an earlier version of this story, Heymann said the sky was falling a year ago and it didn't fall.
But I don't think Heymann is just throwing in the towel because the stock keeps rising despite his warnings. He knows GE and pulls no punches. If he's turning bullish -- or less bearish -- it may be the most positive sign I've seen in some time for the stock.
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Written by Dan Freed in New York
