General Electric's Outlook Up for Debate - TheStreet

General Electric's Outlook Up for Debate

General Electric shares gained ground on Monday even as the beginnings of a debate about the company's fourth-quarter results and outlook stirred on Wall Street.
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Updated to include closing share price.

NEW YORK (

TheStreet

) --

General Electric

(GE) - Get Report

shares rose Monday even as the beginnings of a debate about the company's fourth-quarter results and outlook stirred on Wall Street.

The stock finished up 1.6% at 16.37. Volume totaled 74.9 million, slightly less than the issue's trailing three-month daily average of 76.2 million. The move followed an up-and-down session on Friday following the report when the shares rose as high as $16.76 but ended only 9 cents higher at $16.11 on volume of 162.6 million.

Before Friday's opening bell, GE reported

earnings

of $3 billion, or 28 cents a share, on revenue of $41.4 billion for the quarter, beating market expectations on both counts. Executives also revisited spoke about raising the dividend sometime this year, and said the company would opportunistic about share buybacks on the

conference call.

Sentiment on GE is divided down the middle these days as just as many analysts rate the company a buy (6) as do a hold. Of the remaining four analysts of the 16 that cover the company, 2 have it rated as a strong buy, and the other 2 say sell, according to data from

Thomson Reuters

. Following the fourth-quarter report, it seems views are shaping up to be informed by how confident a firm is in the recent evidence of stabilization in the Capital Finance unit, and whether or not it sees any resulting earnings growth for the parent company over this year and the next.

Goldman Sachs led the bull charge on Monday. It reiterated its buy rating on GE shares this morning, citing favorable credit trends at the company's Capital Finance unit, stronger than expected industrial orders and cash flow from operating activities (coming in at $5.1 billion vs. a firm estimate of $4.1 billion), and more positive commentary from management on the outlook for 2010 than was given at an investor update in mid-December.

The progress at the Capital Finance unit was behind much of Goldman's optimism as it noted that the fourth quarter marked the first decline in non-performing assets for this cycle "suggesting limited downside potential in 2010, and a likely recovery in 2011."

As part of its call, the firm lifted its 12-month price target on the stock to $21 from $20, and boosted earnings expectations to $1.03 a share from 92 cents for fiscal 2010, and to $1.35 a share from $1.25 for fiscal 2011. The $21 price target represents roughly 30% upside from where the stock finished on Friday.

For fiscal 2012, Goldman introduced an estimate of $1.50 a share, which it broke down $1.02 a share from the company's Industrial operations and 48 cents a share from the Capital Finance business.

UBS wasn't quite as impressed by GE's performance, but did raise its earnings estimates for this year and the next, and said it sees a "fairly positive risk/reward profile over the next few quarters" for the stock.

The firm again advanced its theory that "a few clean quarters" from GE could go a long way towards improving investor sentiment toward the company but it kept a neutral rating on the stock with a $17 price target even as it brought its profit views up to 98 cents a share from 90 cents for fiscal 2010, and $1.20 a share from $1.11 for fiscal 2011.

UBS said its $17 price target is in line with GE's historical average multiple based on its revised earnings estimate for 2011, The firm acknowledged a case could be made for a higher multiple -- given the improved credit trends (and thus potential upside) at the Capital Finance unit and "solid" expectations for the Industrial business in 2010 -- but it still sees overhangs for the stock.

These include the potential for aggressive regulation of the financial sector (noting that GE management estimates President Obama's proposed tax on bank liabilities could dilute earnings by roughly 5 cents a share on an annual basis) and questions about what kind of long-term normalized earnings can be expected from the Capital Finance unit.

Making the bear case was Sterne Agee, which retained its sell rating and six-to-12 month price target on the stock of $13. The firm noted, as did both Goldman and UBS, that General Electric's upside to the consensus view for its earnings in the latest quarter was largely the result of tax benefits, calling the path to the better than expected EPS "not ideal."

Going by expectations for earnings of $1 per share in fiscal 2010 and $1.05 a share in fiscal 2011, Sterne Agee asserted that profits will be relatively flat at GE until fiscal 2012, and argued the biggest driver of share price in the intervening period will be a tug of war between sentiment on banking reform and any portfolio acquisitions the company can make. The firm also doesn't expect GE will raise its dividend or ramp up buybacks any time soon either, citing the regulatory uncertainty about capital requirements for the Capital Finance unit.

"Less clear is whether it

GE Capital Finance will also have to significantly reduce its capital structure's current heavy reliance on short and long debt markets," the firm said in its research note. "Our best estimate presently is that GE shareholders should not anticipate any new shareholder value enhancement initiatives (higher dividends or resumption of share repurchase) before 2012."

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Written by Michael Baron in New York.