Pimping General Electric (GE)

http://www.nytimes.com/2008/06/22/business/22maker.html?em&ex=1214280000&en=0ae37b025a65b8c4&ei=5087%0A

 Wall Street’s Fading Crush on G.E.

By NELSON D. SCHWARTZ

Published: June 22, 2008

USUALLY, it’s easy to find bullish analysts on Wall Street. In fact, the criticism leveled most often at stock pickers at major brokerage firms is that they’re too easy on the companies they cover, explaining away every earnings miss and always finding another reason to slap on a buy rating.

Not in the case of General Electric, though. These days, it’s hard to find much love on the Street for what was once the bluest of blue chips. Shares of the company, which makes everything from light bulbs to jet engines to movies, sank to a five-year low last week after one of the few remaining bulls on the stock finally threw in the towel.

“We have been wrong as G.E. underperformance has continued,” said C. Stephen Tusa, a J. P. Morgan Securities analyst who’d had a buy recommendation on the company for three years before downgrading it to neutral last Monday. “We can no longer recommend the stock with the degree of earnings headwind and uncertainty associated with a necessary change in strategy.”

The shares closed at $27.38 on Friday, and are down by roughly a third from last summer. Breaking $30 was an especially sharp psychological comedown for investors who have watched as the company and its well-known C.E.O., Jeffrey R. Immelt, have struggled over the last year to justify the conglomerate’s sprawling structure.

“It’s demoralizing to all even though it’s symbolic,” says Jeffrey A. Sonnenfeld, a senior associate dean at the Yale School of Management and a longtime G.E. watcher. “So much of the job of leadership has symbolism intertwined with substance. Immelt has done all the right things, but it doesn’t diminish the frustration.”

Indeed, for Mr. Immelt, it’s an especially tough moment. A year ago, I wrote a feature entitled “Is G.E. Too Big for Its Own Good?” and the company responded with an emphatic no. Ten points and tens of billions in market capitalization later, the question still lingers — but for investors, G.E.’s beaten-down valuation is finally becoming more tempting.

The stock is now trading at just under 12 times next year’s estimated earnings, according to Robert Cornell, an analyst at Lehman Brothers. That’s a 17 percent discount to the overall market multiple of 14.3.

“When everybody is negative, the upside is more substantial,” Mr. Cornell says. An old-school analyst who has covered the company since 1971, he was following G.E. when some of his competitors were in kindergarten.

“I’ve worked the math,” he says. “And market sentiment and intrinsic company capability are two different things.”

Along with larger questions about G.E.’s structure, that bargain-basement P/E ratio also reflects lingering doubts after the company’s last earnings report in April, when it missed consensus estimates by the widest margin in years. That shook the faith of longtime bulls, like Nicole Parent of Credit Suisse.

“Following disappointing Q1 results, G.E. is clearly in the penalty box,” Ms. Parent wrote in a recent report. “We have limited confidence in the outlook.”

But with Mr. Immelt facing ever more heat — his job isn’t on the line, but long-suffering institutional investors are beginning to stir — another big earnings miss is unlikely when the company next reports profits on July 11. And if the company can beat expectations, or can at least reassure investors about the rest of this year and 2009, a relief rally may quickly follow.

What’s more, Mr. Immelt is belatedly streamlining the portfolio. The appliance business is on the block and could fetch $7 billion. And, further down the road, a sale or spin-off of NBC Universal may loom, at least after the Summer Olympics in Beijing.

Then there is G.E.’s crown jewel, the infrastructure division, which has amassed an unassailable franchise in Big Iron, with value-added products like jet engines, locomotives and power turbines. Making these machines takes tremendous skill, and one of Mr. Immelt’s successes has been to extend that expertise to the manufacture of fast-growing new niches like wind turbines.

The bottom line? Mr. Immelt will get this stock moving, one way or the other, because his job depends on it.

Mr. Cornell puts it slightly more diplomatically. “They are absolutely attuned to shareholder value,” he says.

While the shares may not hit his $37 price target soon, he’s not about to give up on the company the way so many others on the Street have.

“People will have to be patient, but I know it will go back up there,” he says. “I’ve covered the company longer.”

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www.thebishop.us -- The Archbishop Don Magic Juan - Welcome

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