Are GE Shares Finally a Buy?

Although I don’t think the situations are directly comparable, the recent sharp decline in General Electric (NYSE: GE  ) shares suggests a downward spiral in investor confidence that is certainly reminiscent of the events we witnessed at Citigroup (NYSE: C  ) , AIG (NYSE: AIG  ) , Fannie Mae (NYSE: FNM  ) , and other terminal victims of the credit crisis. My sense is that the sell-off has probably been overdone, and it’s certainly worth pondering:

After this selloff, are GE shares finally attractive?

The bull argument: Despite the hullaballoo about GE Capital, GE’s industrial and media assets are marquee franchises that are very profitable. As far as GE Capital is concerned, management is reducing the lending arm’s contribution to total profits and its reliance on short-term funding.

Furthermore, GE Capital recently received a $9.5 billion capital contribution from the parent company. GE Capital’s tangible equity is now $34 billion, for a tangible common equity-to-tangible assets ratio of 5.3%, which GE says “compares favorably to other financial services institutions” (the same ratio for Wells Fargo is estimated at just 2.7%).

And let’s not forget price! At under $7 per share, GE shares are trading at less than seven times the lowest analyst estimate of this year’s earnings per share. The shares’ price-to-tangible book value ratio is at a level not seen since 1996.

The bear argument: GE management has been slow to react to the credit crisis, and that includes the way they are valuing assets on GE Capital’s balance sheet, some of which are marked higher than comparable assets owned by their banking peers (the counterargument is that this may be appropriate if the firm is able to hold those assets to maturity).

In addition, GE Capital is undercapitalized: Richard Hoffman at CreditSights estimates that to achieve a Tier 1 capital ratio of 9% (JPMorgan Chase’s (NYSE: JPM  ) is 10.2%), it would require $25 billion in capital -- a sum that would be very tough to raise externally in this market.

Finally, the bears point to the risk that GE could lose its triple-A credit rating. At A3 or below on Moody’s (NYSE: MCO  ) scale, the firm would need to come up with $8 billion in extra collateral to satisfy its creditors.

I’ve already voiced my opinion on GE in these (Web) pages, and now it’s your turn: Are GE shares attractive at these levels? Vote in the poll below!

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Fool contributor Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. JPMorgan Chase is a former Motley Fool Income Investor selection. Moody's is a Motley Fool Inside Value and a Motley Fool Stock Advisor recommendation. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (57)

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  • Report this Comment On March 06, 2009, at 4:57 PM, 1uptick wrote:

    There is a credibility problem, and i agree that Immelt and company did appear to be slow in action. I also believe they were cautious and learned through the distruction we have all witnessed in the market. Ge physcological effect on the market if GE felled would be catastrophic. One must buy what the government buys and heck or high water we are going green and GE is well positioned for the power grid, wind energy, nuclear and water. i believe GE is a long term BUY>

  • Report this Comment On March 06, 2009, at 5:11 PM, scorp1us wrote:

    GE Finance won't finance purchases of GE Electronics by customers.

    Until that reverses, GE has a non-trivial risk of total failure.

  • Report this Comment On March 06, 2009, at 9:03 PM, Seano67 wrote:

    To answer your question, I would put money into GE at these prices, absolutely. However I already own enough of it- so no, I will not be putting any more money into General Electric.

    I believe that people predicting the demise of GE are gravely underestimating this company's durability as well as its ability to survive, adapt, and thrive, and they have a history of doing that over and over and over again. This is the company founded by Thomas Edison himself, and in the course of their 100+ years of existence, they have seen many, many economic crises, political crises, social upheavals, personal corporate crises, depressions, recessions, inflations, world wars, and they have just doggedly hung in there and survived it all. I would never bet money against this company. I have that much respect for it. It's obviously a shame GE Capital was ever even created, but that's not going to be the downfall or the end of General Electric. They've survived much worse than this.

    If you haven't already done so, if you ever get the time and have the interest, I would suggest you read up on the history of General Electric. It's really fascinating. They're beat all to hell right now and somewhat deservedly so, but to me GE kind of epitomizes the story of a great American company. I love the way they do business, and I feel they're a genuinely 'stand-up' company in a world filled with far too many shyster ones.

  • Report this Comment On March 06, 2009, at 10:20 PM, jerryguru69 wrote:

    Nope. TMF first came to my attention a few years ago when the 2 founders appeared on PBS recommending, you guessed it, GE. At the time, it was selling in the mid 40's. It wasn't a buy then, and it isn't a buy now, no matter how much a bargain it seems. What people miss is that GE was great, but not because GE was great, but because Jack Welsh was that godly. w/o him, GE is just another unmanageable conglomerate. If you separate out the capital unit, it might be worthy of consideration.

  • Report this Comment On March 07, 2009, at 1:36 PM, Surfer3001 wrote:

    Ok for one, i dont think GE going under has ever seriously come up. I mean GM hasn't tchnically gone under yet, neither has citi, BOA, FORD...so I dot think GE has any chance of going under. GE has said they want to clean up GE Capital and once that happens, it will be good ol' GE again. It's basically one of the great buys of the century right now. 20 years from now people who bought large anounts of GE shares under 7 dollars will be very happy. Even ten years from now. Even after the dividend cut, you still get a very respectable 5%. For a dividend investor like myself, this period of selloffs has been like a dream. I am buying as much of this and other countries BEST companies now at prices with yields we have never seen and won't see again!!

  • Report this Comment On March 07, 2009, at 2:24 PM, TMFMarlowe wrote:

    GE was great because it was an AAA dividend.

    Now it's not.

    That said, there's a case to be made for GE here as a buy-and-forget value play. If they survive, $6 will look really cheap 7-10 years from now. But I think I'm likely to have filled my portfolio with better ideas before I get to this one -- there's a lot of value out there right now.

  • Report this Comment On March 10, 2009, at 12:04 AM, jerryguru69 wrote:

    Wow! A genuine CFA. OK, I have a request: go through GE's 10K with the proverbial fine-toothed comb and spreadsheet, and tell me: what do you think?

  • Report this Comment On March 11, 2009, at 11:55 PM, max12345 wrote:

    You say that the reaction to GE represents "a downward spiral in investor confidence that is certainly reminiscent of the events we witnessed at Citigroup (NYSE: C), AIG (NYSE: AIG), Fannie Mae (NYSE: FNM), and other terminal victims of the credit crisis"

    Are you absolutely sure these are each and all "terminal" victims? Or did you sentence mean to refer to "the others" that indeed were terminal? (such as Lehman and Wachovia) Terminal means they're dead or definitely will be. Are they really? They're certainly current victims but are they really dead and gone forever? (though I would probably agree about AIG)

    What if in ten years (or only seven) Citi is selling for $10/ share and Fannie Mae and Freddie Mac are selling for $ 5?

    Not exactly out of this world prices and about one eighth of what they used to sell for, and about ten times what they're selling for today.

    Of course not counting the 40% spike for Citibank in the last two days right after most people had given it up for dead.

    I think 10 times their current value in 10 years is definitely "not too bad" ? And what's the downside risk if your "terminal" diagnosis turns out right?

    O.K. you can lose 10 K now to make 100K in ten years. (and maybe in much less time)

    I would give the good outcome no less than even odds, so it's a good bet to buy. And I bought 4000 shares of Citi and 2000 each of Freddie Mae and Fannie Mac for a grand total of 6K. And now I will just forget about them for at least 5 years. After which I will discover that I lost the enormous sum of

    6K or that I am sitting on a little present to myself

    of 50 to 100K.

    Some time "dead cats" only bounce; but other times

    they have nine lives.

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