Verdict on General Electric: Take a Pass
FAIRFIELD, Conn. (TheStreet) -- It's been quite a year for General Electric (GE) - Get Report.
The industrial conglomerate's stock has risen 34% during the past 12 months, outperforming the
S&P 500 Index's
31% gain despite concerns about its finance unit, credit rating and dividend cut.
Still, volatility was high, suggesting General Electric's shares should have fared even better. Based on a capital asset pricing model, a stock with a beta value of GE's 1.7 would be expected to return closer to 50% when the broader market rose 31%. Because of that, General Electric is hugely underperforming on a risk-adjusted basis.
Bad news has trailed GE over the past year, leaving a good deal of doubt in investors' minds. Ignore the white noise and consider the major drivers of GE's stock when formulating an investment opinion.
GE Financial Falters
General Electric's finance business was hammered by the credit crunch and waves of defaults in the same way that banks and insurers were. The unit's profit fell almost 80% last year, by far the most of any division. Revenue dropped, but write-downs on loans accounted for most of the decline.
GE has more than half a trillion dollars in debt, most of it owned by the finance unit, which is struggling to eke out a profit. Concerns about the business weigh heavily on investors and credit-rating firms. GE has assured investors that financing for the unit is secure, but many wonder about its future, especially now that new regulations are being formulated. Chief Executive Officer Jeffrey Immelt has said he will reduce the size of the finance unit. It will pain him, though: Capital finance accounted for nearly half of General Electric's revenue before the economic downturn.
Credit Downgrade
GE lost its bulletproof AAA credit rating in March 2009 on concern over its ability to meet the demands of its debt. Because the company expects that losses on bad loans haven't yet peaked, that concern is still valid.
The ability to borrow at rock-bottom AAA rates helped GE attain great profitability from its financing unit. Super-cheap capital from debt markets could be lent out in almost any form for a positive interest spread. With a less-glimmering credit rating, that practice is history and could result in the company selling more-risky loans to maintain profitability.
While Warren Buffett appears to have faith in the company, as shown by
Berkshire Hathaway's
(BRK.A) - Get Report
$3 billion investment in the form of preferred shares that carry a hefty 10% yield, that does little to help the company secure the huge amounts of cheap capital the business needs to make quality loans at a profitable rate.
GE Sells NBC to Comcast
Selling the NBC business to
Comcast
(CMCSA) - Get Report
made headlines in December, and many applauded the company for finally ditching its most incongruent business, even though it may have been a few years too late. Now, however, it appears to be the equivalent of selling a car seconds before a rock smashes its windshield.
Regardless of whether you support Jay Leno or Conan O'Brien, one thing everyone can agree on is the fact that NBC left the little dustup with a black eye. Reports have indicated that Comcast was aware of the issues with Leno's ratings in the 10 p.m. time slot when it agreed to buy the business, but few could have foreseen how ugly "The Tonight Show" power struggle would get. O'Brien used the network like a speed bag for two solid weeks as negotiations were carried out.
The scuffle resulted in a huge amount of Internet backlash over NBC's treatment of O'Brien, weakening the network's appeal to the coveted 18-49 demographic. It appears that GE may have gotten out at a good time, as the future of the network is less certain than ever. While programming at NBC results in only a fraction of revenue compared to segments like the feature-film business, the value of the NBC brand was tarnished over the past month.
In 2009, GE had more than its fair share of bad news, and the company's stock suffered as a result. This could lead to a great buying opportunity, but 2010 doesn't appear to offer smoother sailing. Until the final tally for loan losses is in and the ink is dry on the deal to sell NBC to Comcast, the share price is likely to be volatile. Investors could do well to take a wait-and-see approach.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.









