The Short Case for General Electric
General Electric Co. (GE) may well project the image that the risk emanating from lower earnings has been substantively offset by heavy capital infusions, including a $3 billion package from Warren Buffett. However, GE today is one of the most shorted stocks in the marketplace; three-month put options at $17.50 and $15 respectively are highly recommended.
For many weeks now, analysts have been warning that the financial-services unit of GE is being pressured by the crisis in mortgage debt. But GE remains a barometer of the global economy, due to its involvement in nearly 100 countries in businesses ranging from light bulbs to aircraft engines, from commercial real estate to infrastructure. Therefore, what GE really needs to do is publicly disclose the extent to which the dramatically changed international investment climate has impacted the valuations of various components of the GE business model.
After all, GE justified its geographical and segmentation diversification on the basis of the core assumption that the several emerging markets in Asia, Eastern Europe, Africa and Latin America represented significant inherent medium term and long term value. So investors should rightfully demand that the company categorically state whether the potential degradation in the status of GE’s non-US assets, which generated more than half of its revenues in 2007, has been fully captured in Friday’s earnings announcement.
For all practical purposes, there is no evidence to show when and how GE will complete the fairly complex task of revaluing its non-US assets in accordance with recognized international standards, not by the dubious standards applied in most developing countries. GE’s capital raising plans are likely to ward off the imminent threat posed to GE’s existence by the absence of liquidity in the commercial paper arena; but they will do little by way of consolidating and improving shareholder value. A share price under $10 by the first quarter of 2009 should not cause any surprises.
Disclosure: Author holds a short position in GE
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This article has 8 comments:
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gothamguy212
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1 Comment
Oct 10 07:33 AM-
M. Weinstein, SA Editor
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39 Comments
My Website
Oct 10 07:39 AM-
kurt walter
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409 Comments
Oct 10 10:39 AM-
PizzaMan
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1 Comment
Oct 10 10:52 AMBring back the uptick rule.
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Terry Huebert
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64 Comments
Oct 10 12:54 PM-
capgain
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22 Comments
Oct 10 01:52 PMI'm sorry, I just couldn't help it. In addition to adding to my GE position @ under $20, I also added Jan 2010 calls at $20 and at $25. I've lived through at least five serious "crashes", but this one is so over-hyped it is almost ready for the daytime soaps!!! We might not be at "the bottom", but remember....no one rings a bell when you get there!!!
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Aalan
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116 Comments
Oct 10 02:52 PM-
CPST1
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56 Comments
Oct 13 12:30 AM> All in all we end the third quarter with $170 billion of backlog
>diversified globally over the last few years and today 55% of our revenue comes outside the United States
>divested Mortgage Services, FGIC, the bond insurance business, primary insurance, mortgage insurance, re-insurance, mortgage distribution and our Japan consumer finance business
> accelerated our liquidity plan and we have clear protection now if the CP market remains under duress
>equity offering gave us more cash and now the back up lines plus cash are greater than CP.
> plan to maintain the GE dividend through 2009
>Capital Finance earned slightly over $2 billion
>backlog was up $8.5 billion versus a year ago
>wind commitments are $14 billion it’s up 90% from a year ago
>>segment profit up 36% coming from the great wind and gas turbine volume
>Oil & Gas -- Op profit was up 29%
>\>Hydro acquisition which is off to a great start. gt;Hydro acquisition which is off to a great start.
>Technology Infrastructure. Revenues of $11.5 billion were up 9%
>NBCU -- revenues of $5 billion up 35%
>> Cable continued to deliver great results. The segment profit was up 24% -- MSNBC had another great quarter
>Assets of $622 billion, they’re up 12% from a year ago
>Real Estate --ended the quarter with assets of $89 billion
>>30 delinquencies are only 0.6% of average net investments -- The portfolio is very strong
>Commercial Lending and Leasing, -- down 56%
>>over $400 million of the negative marks
>risk management/credit cycle/ higher delinquencies
>>higher losses in GE Money -- losses in the Americas - $800 million to $1 billion
>Corporate and Real Estate debt -- we basically shut off the equity originations
>Capital Solutions -- If we don’t have the returns we’re not putting the capital there -- ...We think the attractive pricing is obviously going to continue for the foreseeable future here.
pg.4 seekingalpha.com/artic...
>fourth quarter outlook -- funding a lot of high return stuff over $20 billion in Commercial Finance alone
> this week the Fed announced the CP funding facility for highly rated CP issuers!!!
>> amounts up to our outstanding August 2008 which is over $60 billion for GE Capital Corp and over $10 billion for GE
>>> our team is working with the Fed to make sure all the mechanics are in place to help support the confidence of our investors
>Quality of the Portfolio -- FQ3 we had $413 billion of Commercial assets and $209 billion of Consumer assets
>> 72% of the Commercial exposures are $100 million each, and 60% are under $50 million
>>> the top 20 exposures they’re to the airlines and railroads and a couple power plants. ---- All of them are senior and secured and collateralized by the assets. There’s no unsecured exposure in the top 20 of any size.
>We don’t have any SIVs, we don’t have any CDOs, we’ve never sold CDS, and we don’t have any exposure to counter parties
>mortgages are not US -- Seventy nine percent of the portfolio is outside the US ---- over 80% has mortgage insurance on it globally
> North American receivables the delinquencies on 30 days are up to 6.2% -- loss provisions are up 34% -- total year estimates is up $800 million to $1 billion -- loss provisions are growing faster across the globe than our write offs
>> we’re putting up more provisions than the losses we’re experiencing and we’re ready for the future here
>2008 would include up to $6.6 billion of pre-tax provision losses
So $6.6 billion this year will be a big increase several billion dollars over last year and next year could be $7.5 to $9 billion and that would bring our total credit losses somewhere between 1.4% to 1.7% which would be very close to the peak and I think that’s important because when you look down on the left what’s different about the portfolio from ’90-’91 to day is dramatic.
In ’90-’91 we had very limited geographic diversity we were very US focused.
pg. 5
seekingalpha.com/artic...
>Infrastructure is about 50% of GE’s earnings in 2008 -- substantial future growth just based on the backlog because the products drive energy efficiency
>> oversold positions which give us I think some buffer for volatility
>>$15 to $20 billion of raw materials they are driven by steel, nickel, aluminum, things like that
> the environment is volatile but GE is executing
> We’re going to return $13.5 billion to investors in 2009 through dividends