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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!