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GE Upgraded by Merrill Lynch

The brokerage calls GE a buy on optimism about double-digit earnings growth in 2005.
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Updated from 11:03 a.m. EST

Merrill Lynch is recommending investors purchase shares of

General Electric

(GE) - Get Free Report

, based on its expectations for a break-out year of double-digit earnings growth in 2005, but other analysts who follow the company are not as optimistic.

The investment bank upgraded the stock to buy from neutral, saying it expects GE to post a 15% jump in profit in 2005. Predictions are for $1.85 a share, vs. forecasts for $1.60 a share in 2004.

Merrill set a 12-month price target of $33 on GE. The stock was lately up 76 cents, or 2.7%, to $28.56, but still well below its 52-week high of $32.42 in late September.

"After four years of relatively flat profits, we think that the resumption of a double-digit earnings per share trajectory will also provide an important positive share-price catalyst," said John Inch, an analyst at Merrill Lynch, in a research note. (Merrill has a banking relationship with GE.)

Inch said 2004 is going to be a "key inflection year," as GE "absorbs the last of the negative decline for power turbine shipments while completing and beginning to integrate several large strategic deals."

Last month, GE said it would buy


-- a British medical device maker -- in its latest acquisition. Earlier this year, the conglomerate's NBC unit set plans to take over

Vivendi Universal

(V) - Get Free Report


"We are generally positive regarding the strategic rationale for these transactions, although we continue to believe that GE is paying a large premium to purchase Amersham," Inch said. "Still, we believe that the market has already priced in that purchase price since the deal was announced." Shares of GE have declined 8% over that time, while the

S&P 500

is relatively flat.

Inch said that he is "bullish" on the $14 billion Vivendi deal, despite concerns -- which include the threat of intellectual content piracy -- raised elsewhere about the combination.

"Our conviction in our upgrade is further bolstered by the company's changing portfolio mix toward higher-growth, higher-return businesses that should augur for incremental multiple expansion," Inch said.

Looking ahead, Inch said that he derives his price target for GE by assigning a 19.5 trailing price-to-earnings multiple to its 2005 $1.85-a-share earnings estimate, and in turn, discounting the shares to the end of 2004 at an assumed shareholder equity cost of capital of 10%.

Nevertheless, 13 months is a long time to hold a stock in anticipation of stronger results -- especially since there is limited optimism about the company's profit-growth prospects next year.

"2004 is unlikely to be a year of accelerating momentum for GE earnings," said Nicholas Heymann, an analyst at Prudential, in a recent research note. "The incremental fundamental improvement we thought we had begun to see appear this fall now looks less likely it will be realized, and higher share count and pension, healthcare and tax rates appear to have further trimmed back the chances for GE's nominal earnings growth for 2003 to accelerate in 2004."

Meanwhile, Brett Gallagher, head of equities at Julius Baer Asset Management, said that the 19.5 trailing multiple was aggressive, despite CEO Jeff Immelt's recent emphasis on a higher-growth portfolio. "Any changes being made are incremental, rather than revolutionary," he said.

"Excluding the bubble period, GE has traded between 15- and 20-times trailing earnings," Gallagher added. "A 19.5 multiple is obviously toward the higher end of that range."