General Electric Shares Face Cyclical Risk

| About: General Electric (GE)

Given the latest slippage in global economies and industrial production here at home, investors may be questioning their bets in General Electric (NYSE:GE). So, I thought I might take a critical look at the multinational industrial's shares.

General Electric, as a large industrial sector multinational, has been a beneficiary of the development of the global marketplace and emerging markets. However, General Electric is also a cyclical stock with a chart that tends to exaggerate the performance of the Dow Jones Industrial Average. Statistical analysis confirms this observation, based on General Electric's beta of 1.5, as reported by Yahoo Finance. Thus, if the economy is about to turn lower, then General Electric could be threatened near term.

Chart forGeneral Electric Company (<a href=

The latest relative economic data came last week, with the Industrial Production data for the month of May reported. Industrial Production slipped 0.1% against economists' consensus expectations for no change. The result was also lower against the prior month's revised rise of 1.0%. Within the manufacturing sector, industrial production slipped 0.4% against expectations for a decline of 0.3% and a prior-month revised gain of 0.7%. While the decline was promoted by the media as a horrible negative, the truth is that production is still higher than most other months this year. May had a high threshold to overcome, and so the monthly slippage shouldn't be exaggerated. As a result, I reiterate that the immediate threat to industrials securities like General Electric, the SPDR Dow Jones Industrial Average (NYSEARCA:DIA), Industrial Select Sector SPDR (NYSEARCA:XLI), Caterpillar (NYSE:CAT), Deere (NYSE:DE), and other major industrials should be somewhat muted near term.

As for the longer term, it's the economic contraction I see ahead that worries me about these stocks, including General Electric. Signs have been materializing in the regular monthly economic report flow, including data points reported just last week. I recently detailed my concerns in my report entitled "Recession - Don't Ignore The Signs" and in articles like "Creeping Towards Recession" over the last few months.

Perhaps somewhat telling with regard to the creeping impact to General Electric that may lurk for the quarters ahead, analysts' estimates for the June quarter have been on the decline, falling to $0.37 from as high as $0.39 just 60 days ago (according to Yahoo Finance and its data partners). Analysts' investment opinions with regard to buy, sell, or hold views have not changed much though over the last three months, with a majority favoring the stock.

Still, analysts tend to lag the market on average. The indecision of the economy as it sort of slugs along creates a real challenge for market strategists and puts a heavy burden on economists' shoulders for their guidance in-house at the major investment banks like Goldman Sachs (NYSE:GS), Merrill Lynch Bank of America (NYSE:BAC), and others. Thus, analysts are perhaps left unsure (informally) as to the macroeconomic driver for their cyclical coverage. It's a real stockpicker's market, but it will be the analysts with strong macroeconomic discernment that excel -- and there are even fewer of those on and off Wall Street than pure stockpickers.

So, while I see a macroeconomic burden weighing against industrials including General Electric, we can't make a clear forecast without a look at valuation. General Electric's P/E ratio of 16.4 times compares as might be expected to its historical 10-year P/E ratio. The simple value measure was much higher into the last bubble, but it was also significantly lower at the other end of the sentiment spectrum in early 2009. Still, General Electric's historical P/E shows it may have gotten adventurous more recently, before retrenching slightly with the latest market turmoil.

The company's forward P/E ratio is about 12.7 times the consensus EPS estimate of $1.55 for 2012. That compares appropriately to analysts' EPS growth expectations for this year and the next five years (12.7%), giving the company a PEG ratio of about 1.0. It would be hard to justify the sale of the stock based on this news this early, especially for large-cap portfolio managers. General Electric is such an important and embedded industrial with as strong an opportunity internationally as any other industrial player. So, it's a soft hold for now in my book, given its valuation and growth outlook, but I would start spreading my risk with a defensive inclination. I expect the stock will be penalized at the front line of the beta spectrum due to its cyclical nature once the economic direction becomes clear.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.