Tuesday, September 08, 2009

General Electric (NYSE:GE): Upgraded to Overweight at JP Morgan; $17 target

JP Morgan is upgrading General Electric (NYSE:GE) to Overweight from Neutral and raising target to $17 (prev. $12).

Firm notes the the downside here looks attractive versus others that have run, which, combined with an ongoing discount for sentiment, sets up for an interesting relative risk/reward, in their view. Given the recent run in the most disliked stocks, and how quickly sentiment has turned, they would rather be early, especially for one such as this that has underperformed for such an extended period of time, and for which there has been arguably the most controversy. In short, the firm thinks this is one of the last “non-consensus, a little good news can go a long way” stocks in the group.

Starting point: Negative sentiment and under-performance. GE is now among the lowest-rated stocks in our sector (only 30% Buy) with ongoing fear around GECS. Since June ’08, it’s down 55% vs. the group’s -35%, and down 68% vs. the group’s -43% since GE’s peak in October ’07.

Yes, GE was as “too big to fail” as anyone, but this point is moot: There are a few things JP Morgan acknowledges, which are in line with their formerly bearish thesis. First, it’s likely the company would be in far worse shape if not for some extraordinary government help from the TLGP and CP guarantee programs, and they believe GE will go down as the least publicized “too big to fail” story in the crisis. Second, without the unusually large tax synergies, which should have been explained as the key reason why GE Capital will maintain its book earlier than this March, GE Capital would be eating into equity as they speak. These issues are what they are, however, and have little to do with the forward fundamental trajectory, which they think has the chance to not be as bad as stubbornly low expectations.

Wall of worry intact at GECS . . . Concerns include 1) provision/impairment levels, 2) rising funding costs, 3) regulatory uncertainty, and 4) mark-to-market risks (CRE), all of which add to questions around LT earnings power.

. . . but they feel comfortable their expectations are conservative . . . 1) On losses, the stress case looks reasonable; 2) Firm assumes a $10B infusion; 3) rising funding costs hit ROI by ~70bps, manageable; 4) forecasted 10%+ TCE by ’12 should satisfy regulators; and 5) with depreciation/impairments, CRE equity holdings should go to FMV gradually by ’12. In the end, the firm sees a pathway to $6B in normalized earnings here, a 1.4% ROI (1.2% ROA), below guidance of 2%.

. . . while investors may already be numb to the worst case. Similar to the stock dynamics around the dividend cut/AAA, even if something bad happens on one of these fronts (like a capital raise), it may not be all negative, as none are likely to critically destroy value long term. JP Morgan thinks risks to their estimates are to the upside, including an earlier peak in losses, or upside industrial FCF/asset sales that eliminate the need for a capital raise.

Industrial fundamental visibility low, but they could be done cutting estimates. JP Morgan remains Street low at $0.60 in EPS for ’10, the trough, and data points from here could point to “stabilization.” Importantly, their normalized EPS is based off of this conservative trough.

NBCU, an auto/housing play, bottoming, undervalued. Signs of life in media M&A may rekindle hopes of a strategic move at NBCU. They think a move here could unlock ~$30B of value, meaningful at ~20% of GE’s market cap, and a significant positive given mixed recent history.

Not expensive on trough/normalized EPS. Firm sees support at ~$12, or 17x their conservative trough, with a best case at ~$20. They peg fair value and their PT at ~$17, enough to justify their OW in the context of an overvalued group.

Notablecalls: I think GE will be up around 5-6% on this. JP Morgan is a solid player and their calls matter in the space.

Don't buy too high because the open usually provides a nice entry in GE.

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