Flashback to 1997, GE at $23 (update with article)

Yeah, 1997 was the last time you could have bought shares of GE (GE) at $23. The difference? Now that price comes with a 5.3% yield and shares trade at 10 times earnings, not the 24 times they traded at then.

In the latest quarter, global revenues growth was +24% (emerging markets +20%, developed (ex. U.S.) +26%, U.S. (2)%).

What’s the problem? Fears over GE Financial Services. In Q2, Commercial Finance earnings grew 7%, GE Money fell 9%.

The fears at GE Money are overblown. GE Money encompasses roughly 13% of profits at GE. Let’s assume earnings for the year, about $4 billion are wiped out. It won’t, because GE Money is not structured in the “borrow long, lend short” model that is currently crippling financial institutions. They underwrite to hold. In consumer mortgages (UK), they are self funded and have a mortgage LTV of 70%, meaning mortgage holders on average have 30% equity. In consumer credit, the current delinquency rate is 5%, not bad. But, for arguments sake, let’s say earnings are gone. That would still leave GE with approx. $20 billion in earnings of $1.97 a share. That still leaves GE trading at 11.6 times earnings and yielding 5%.

GE is saying Commercial Finance earnings ought to decline in Q3 10% to 15% and GE Money ought to grow 0% to 5%. Hardly the desperate scenario the markets are currently pricing into the stock price. What is of interest is that revenue growth at both divisions ought to grow 5% to 10%.

GE, during the Q2 results presentation forecast 3Q’08 continuing EPS outlook of $.50-.54, (0-8% growth)and said they were on track for 2008 guidance, $2.20-2.30, (0-5% growth).

Now CEO Jeff Immelt got himself in hot water when in the spring he stated 15% EPS growth for this year was “in the bag”. Because of that there is now a slight cloud of skepticism over him and the company. The only way to erase it is to perform and show it to be an aberration. That, will take time. Coming through the current relatively unscathed would be a huge first step.

Ge is currently being price not as the conglomerate it is, but as a financial service company. That, has created a great buying opportunity….

I think I just may bite soon..

Here is a recent WSJ article on the subject

Disclosure (“none” means no position):
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