Will GE Drop Below $30?

General Electric Co. (GE) has had a bit of positive news flow lately. The company’s energy unit won a $500 million contract to supply gas turbines and generators to power plants in Saudi Arabia and suitors have emerged for the company’s appliances division that could result in a sale worth up to $8 billion.

Exiting slower growth businesses has been commonplace at General Electric. Since 2003, the conglomerate has generated $52 billion from asset sales and reinvested the proceeds into other businesses, buybacks and restructuring activities. But there is little to show for it as the earnings outlook looks as bleak as ever.

Flattish growth for the current year has put earnings at $2.22 per share and the consensus estimate for the full year 2009 has continually eroded, even after being substantially cut from $2.70 to $2.47 after the first quarter report. Not even chairman Jeff Immelt’s purchase of 115,000 shares of stock at an average of $30.60 on Wednesday could spark any confidence.

With the exception of a breakup or some other drastic move to act as a catalyst and increase shareholder value, nothing will save General Electric shares from inevitably trading below $30.

Related Articles:

•  May 21, 2008: GE Hits Post-Earnings Low, Even as CEO Reiterates 2008 Guidance

Comments

[capgain]

One of the strengths of a free capitalistic society is that anyone is free to opine on any subject; it is up to the listener/reader to determine just how much credence to give it. In this case, Ant & Sons has an unimpressive provenance and the opinion expressed is similarly less than impressive. The writer should be sure to call Jeff Immelt and tell him to "get right to it!"

[BS Detector]

"...nothing will save General Electric shares from inevitably trading below $30."

Why? This piece doesn't even come close to answering this fundamental question. All you provide is a few data points related to profitability, but you don't even put these in historical perspective. How do the expected earnings compare with previous earnings? How does the current PE compare to historical PE? What makes you think, on a valuation basis, that GE will "inevitably" trade lower?

Come on, I know it's in there. Enlighten us.

[Not an Idiot]

What a stupid stupid article.

[Roginfl]

In 1951 I went to work at GE in financial management, right out of college. I was graduated from its financial managment program (FMP - formerly called BTC) and later attended its Advanced Management Institute called Crotonville, in Ossinging, New York. It was a great company with an abundance of very sharp people. I know of no reason to think otherwise now. Perhaps its success over these many years has led to unreasonable expectations. If its stock does go below 30, I doubt it remains there very long.

[longandshort]

Who is the clown who wrote this article?? Probably and Definitely a professional short selling trader!

Did this crook do his/her research and find out that GE is heavily into Wind Energy...no growth...[Comment edited for abusive language. Commenter put on watch.]

[notsosmart]

if it goes to$29 im in for more.

[User 118677]

Me too.

[MrPositive]

The article is negativism at its ugliest. GE is a magnificent forward thinking Company with some of the best trained and functional managers in the World. Smart people should be investing in GE now before it moves upward out of its present trading range !

[Roginfl]

Fortunately for GE, it never employed any libelous, profane people such as "notdumb". Methinks his name should more likely be "dumbdumb". The area of wind energy, which he cites as no growth, sure will benefit from his wind.

[capgain]

Earlier today, "notdumb" correctly pointed out GE's involvement in wind energy. I believe that this, along with their continuing presence in turbine, locomotive,airplane engine,finance, etc. will pale in comparison to their dominant position being established worldwide in potable water. Jeff Immelt has not been shy about shedding the sacred cows like plastics,appliances in favor of meeting the planet's needs tomorrow for water, renewable energy, etc.

While he did get taken to the woodshed last qtr for disappointing the street, you do have to sit up and take notice when a guy believes strongly enough in what he is doing to back up the Brinks truck the way he has to buy his own stock with his own after-tax dollars!

My grandchildren should start sending him thank-you notes now.

[ajhough]

I guess I am in the minority. I am almost always adding to my position in GE. It would have to get much below 29 before I would be under water. I think the PE is coming down to a more reasonable number, the management is fine, and the company is still GE. At 2.47 next year, the forward PE is below 13.

[C. J.]

What an opportunity to buy GE! It always astounds me how short sighted financial analysts are...here's a company repositioning itself quite well for the future in the right markets for growth, has a PE of under 15, has net income in the billions, and it's getting clobbered. GE is not on the downside. It's on the upside. I only wish I had more money to invest in this company.

[rockymtnway]

GE could go lower, but there's a few things that tend to make me think it's at or very near its bottom. First, the dividend yeild is over 4% currently with bank interest rates at historic lows. GE always seeks to reward its shareholders with solid and consistent dividend growth and GE is just the type of diversified company that folks trust almost as much as money in the bank.

Next, this isn't a company that is in trouble. GE failed to meet earnings in what is traditionally its weakest quarter of the year, Wall Street is in a very fickle mood with financial services companies right now, and the feeding frenzy began. However, if you look at revenues, GE continues to amaze year after year with revenue growth from $150b in 2005 to $173b in 2007. The $500 million Saudi contract you mention doesn't even amount to 5% of their revenue growth for 2009. That's why the market didn't care.

While I am rather bearish about the economy as a whole, which is going to keep all stock growth tempered for the next year or so; I can't think of a place I'd rather keep my money right now than in a solid company like GE.

[bearfund]

I really want to own this stock, but I'm not willing to overpay. The company does many interesting things (the energy part of the business is awesome) and makes a lot of solid products that people need. But it trades at 14x earnings and has a shocking amount of debt, no clear growth trend, and unnecessary and pointless exposure to the financial sector. The 4% yield is starting to look pretty good, but the payout ratio is getting a bit high and I figure there may be a few more surprises of the bad kind lurking here. I'll pay 14x earnings for a company that I think might double in value in the next year; that's simply not going to happen here.

Basically, like the company, hate the price. I could say that about several dozen issues right now. Too bad the PPT is propping up the market and doing its damnedest to deny us our much-needed 40% blowoff. Bear markets are far and away the best time to make money; overpriced markets aren't worth the effort. If the powers that be GTFO of the way and let the big move down happen, I'll be ready to exchange 100 ounces of my gold for 5000 shares of GE. Until then, I sincerely wish the longs the best of luck. You've got $20 worth of stock in a great company; the only problem is that you paid $30+ for it. Here's hoping for your sake that Mr. Market's head remains firmly embedded in the sand...or his nether regions.

[Oscar BullFrog]

with numbers like these:

Market Cap (intraday): 306.20B
Enterprise Value (31-May-08): 838.74B
Trailing P/E (ttm, intraday): 14.20
Forward P/E (fye 31-Dec-09) : 12.59

Total Debt (mrq): 547.84B
Total Debt/Equity (mrq): 4.723

it sure seems like a scary time ... even if:

Purchase 2008-03-11 GE IMMELT JEFFREY R 62,000 $32.93 $2,041,938 1,425,811 (Direct)
Purchase 2008-03-03 GE IMMELT JEFFREY R 90,000 $33.42 $3,007,797 1,363,811 (Direct)
Purchase 2008-05-28 GE IMMELT JEFFREY R 115,000 $30.61 $3,519,818 1,540,811 (Direct)

thoughts?

[TickL Me Elmo]

The author made no case for any correct valuation.

Nothing he wrote gave any indication of what GE is truly worth or what their shares should be selling for.

[kyndyll]

Wow, what an incredibly superficial fluff piece. Love the justification that the stock price will go below 30 b/c of .... well.... really nothing at all.

[Clearlead]

horrible article, totally shallow, mr. market may have put GE on sale but I see this as an opportunity.

[dananoah]

With all the insider buying recently at 30.18 to 30.50 it would be my guess many believe the stock will move up above 35.00 not below 30.00. Ge has many strengths to play on, Solar, Wind, Turbines, Infrastructure, Defense, etc.

[Lonnie Devereaux]

Come, come! This is financial journalism at its best. A fine bit of investigative work, to boot. My hat's off to you, sir, on a job well done. First of all, your typing is immaculate. I wholly applaud your use of black ink against a white background, for maximum contrast. Jolly good! Second, your one-year chart is spot-on, and directly supports all the strengths of your written argument. If you follow the line from left to right, it trails downward, without a doubt! Only a fool would fail to recognize the trend. As a result of reading this gem of an article, I have scraped together every cent I could muster, both from the family fortune and from every friend and acquaintance I know, and have shorted the daylights out of GE. When the billions start rolling in, over the next few months, we will celebrate your name, sir, erect a statue in your honor and savor the whimpers and cries of anguish, of those who dared to question your dazzling insight. Bravo! I repeat thrice more, Bravo! Bravo! Bravo!

[kkin365]

The current issue of Barron's (6/2/08, on sale or distribution today, 5/31/08) has some good words for GE. I have no position in GE, but my view on GE has been favorable all along. Along this line, the poster failed to disclose his/her financial relationship with GE.

[jse17]

Great on point analysis Mr. Bearfund - supra!

Interestingly, the CBI Kool-Aid consuming stockholders express unyielding optimism in their evaluation of a firm that missed earnings albeit greater than GE. Repeat an old stock market saw three times each evening before bedtime, “It is bad to miss earnings, very, very bad!”

None of us know where the bottom of a stock’s plunge settles but historically the number is likely associated with far less passionate, unwavering, defending the flag, unbridled enthusiasm then demonstrated in the majority of comments posted here!

I know, all of us non-believers are complete idiots but I have found this characterization nicely profitable over the years. Yes, I like GE but at a more to far more attractive price. No, I am not short GE. Good luck to all.

[Yooga]

Yall make no sense when you say you love the company but wouldn't buy it till 20 something........ Uh when you buy it at 20 something wouldn't you be expecting it to go above 30 or even higher than that? Otherwise why would you buy it at 20? Very baffling to me, if you are trying to time the bottom I wish you all the luck. Problem is it will take luck to hit that bottom, mize well stop wasting time and go to a casino they are open 24/7 :P.

[chrism1962]

As you're probably aware I'm bearish on the near term prospects for GE. The financial divisions have further problems to come, and all other divisions ( with the exception of infrastructure) are also performing badly.

On the Infrastructure side wind power has an upside, Nuclear looks poor ( compared to Areva and Toshiba), Aero Engines looks problematic with high oil prices ( planes already being taken out of service), Locomotives look OK, Turbines look Neutral ( many players in the market).

In the short term problems with the Commercial Real Estate portfolio are likely ( write downs of up to $6 billion based on a 12% asset depreciation).

Loan rollovers are also a major problem if the tight credit markets do not improve.

Overall I expect another 3-6 quarters of poor figures, until the company is more focused. Expect further asset sales to help hide the asset depreciations. I expect a bottom at around $26, in the 4th quarter.

I have no interests to disclose in GE.

Chris Marshall

[bearfund]

Yooga, it's all about returns. My goal in my long-term portfolio is a 12% annual total return after all taxes and loss of purchasing power. We will assume for the purpose of this analysis (not necessarily safely) that dividends and long-term gains will continue to be taxed at 24.3% (15% federal + 9.3% state) and that the dollar loses 7% of its purchasing power every year.

Now, to GE. Suppose that next quarter or two GE announces more poor results and cuts its dividend from 31 cents to 25 cents (a move I would think prudent given the challenging environment many of their divisions face and their debt load), and the stock drops to $20 and I buy it. That $1 annual dividend is worth $2.63 to me over 5 years, assuming it's not increased in that time and I don't reinvest it. To achieve my goal, then, I need the stock to be worth $48.04 after I'm done paying taxes on the gain, or $57.04 on the market. Is that a realistic 5-year price target? Maybe. It represents 23.3% annualised appreciation. Certainly not unreasonable for a highly leveraged company starting at a low multiple (about 9-10x earnings). If we allow P/E to rise back to 16 where it was before the stock bubble got going in 1998 and again after it burst in 2003 (but far higher than it was in the great bull market of the 1980s), we only need 10% annual earnings growth. Analyst estimates for FY2009 are $2.44 against $2.22 for FY 2008 - 10%. If you see P/E back at 20, you need 5.3%. The past 5 years have seen 9.5% growth excluding items or 7% growth with them. $55-60 seems like a reasonable target.

Now suppose instead that I buy now at $31, results don't get worse, and the dividend is not cut (this must be what you're betting on if you're buying at $31, right?). The dividend is worth $3.26, and I need the stock to be worth $75.27 after I'm done paying taxes on the gain, or $89.48 on the market. Even allowing P/E to rise to 20 (where it spent most of the past 5 years), you'd need 15% annual earnings growth to achieve that target.

So I could see paying as much as $22-24 for this stock right now if make a couple of more favourable assumptions about my use of the dividends and force myself to be unusually optimistic about the economy overall and the company's ability to overcome some challenges. Any more, though, and I see little chance of meeting my investment goal. It's not about finding the exact bottom, it's about buying at a price that makes your goals achievable. If the company performs as I expect over the next 5 years - and I've already said there's much to like - then $31 is not that price. But, again, if it does, and the bottom is not $20 but $15, I'll still achieve my goal, perhaps averaging down along the way for a bit of extra profit.

Maybe your goals are different or your expectations for GE are different: do you really see 15% growth and have a $90 2013 target on this stock? If so, good for you. Or maybe you're just trading it, figuring it's taken a beating and is due for a short-term bounce. That's not unreasonable either. But just saying "if you'd buy at $20 you must assume it will get back to $31, so why not buy at $31?" doesn't make any sense; it assumes that the purpose of investing is simply to generate some kind of nominal profit, however small, at some arbitrary future date. After all, I'm fairly certain that someday the market value of a share of GE will be $1000; does that mean I should issue $1000 limit orders for it until I run out of margin? Your question assumes that the dollar doesn't lose purchasing power, that there's nothing else to invest in, and that you don't have to pay taxes. And it assumes you are a university endowment that can hold forever because you will live forever. If you're making those assumptions, I fear for your sanity, to say nothing of your investment success.

[truthinvesting]

i think if the credit marketstabilize their could be a "write up" here. More upside then downside

[t. Concerned]

I worked for GE for 10 years. The stock hasn't moved upward for over six years, if you're a long term holder of the stock since 2002. My 401K is still intact in GE stock and the only good news is that I plow the dividends back in to stock purchases. I'm wondering when enough will be enough. I think the stock gets a bad rap but I'm getting very impaitent and I'm wondering if and when the board is going to get involved. Is the CEO the right guy for the future? If you look at his record the stock has been flat or down. Time for a change????

[Thinking ahead]

There is only one truthful voice on stocks - - Mr. Market. What is Mr. Market saying about GE?

[truthinvesting]

Mr Market is generally"truthfu... but NOT always.I bought BNI in January at 77 when he was distressed and now its over 110.lol

[Football Geek]

Name calling aside, GE is a great company. I'm sure this short
term dip will be a good entry point for people who buy the
company, and not the share price.
A couple years out will see the share price over forty. So the
share price goes lower, who cares. GE is going to make me
alot of money in the future.

[faithinusa]

Hey folks-lots of negative news is this country in a depression or what?Sure stocks may fall but don't count this contry or Wallstreet out!GREAT times are just ahead!History repeats and after our asian war we had one of the best runs on the street ever from 1000 to 11000!We spent Billions in this war and when the recovery comes GE and countless others will make many millionaires in this depressed market with bargain shares now being bought by wise investers!BUY and HOLD GE ,my advice!!

[PUNK]

I bought GE at 29.97, 1000 shares. I drive a used corolla 96 car I bought and I save my money instead of getting into debt. I do not have a college degree, 2 year trade school so I made good money. I chose to buy GE instead of putting into a CD. I do not need the money for 20+ years since I am 24. I like that whole dividends deal and being able to reinvest them automatically. I wonder what GE will be worth in 20 years?

[bearfund]

Just picked up a bundle of GE at $19.96. Thanks for the debate, guys; it was fun. The only question that's left is whether I paid too much.