With General Electric Co having gone through a very volatile year so far, and shares at $10, the question of whether to buy or sell hinges on two factors.

Does its GE Capital finance unit have enough money to ride out a severe recession and an expected surge in loan delinquencies? And will the strength of GE's core industrial businesses -- it is the world's largest maker of jet engines and electricity-producing turbines -- be enough to offset the troubles at its finance arm?

The U.S. conglomerate's shares have fallen 40 percent since January 1, more than twice the drop in the blue-chip Dow Jones industrial average <.DJI>, of which GE is a component.

Early this month, the stock hit an 18-year low of $5.87 as investors sold heavily on fears GE Capital finance was not adequately prepared for an expected surge in delinquencies.

Last week, Standard & Poor's cut GE's credit rating one notch to AA-plus, and the board voted to slash its dividend by 68 percent to preserve cash. GE shares have since climbed back to $10, up 3.5 percent on Tuesday as the outlook became more clear.

Even so, that leaves GE's market capitalization at about $102 billion, down 71 percent over the past 12 months.

Most analysts currently rate the stock as hold -- advising investors to sit tight before making any moves.

Stock analysts, on average, currently have a target price of $11.50, with the high end at $20 and the low at $7, according to Reuters data.

BULL CASE: ENOUGH OFFSETS

GE shares currently trade at about eight times estimated 2009 profit, well below the average price-to-earnings ratio of 11 times for the Dow. That gap suggests investors place little faith in the company's current earnings targets.

While GE has not provided a number for its per-share target for 2009 profit, it has sketched out a framework that calls for GE Capital to be profitable this year and earnings at the industrial businesses to be flat to up 5 percent.

Analysts, on average, look for earnings of $1.14 per share, excluding one-time items, a drop of about 40 percent from the year earlier, according to Reuters Estimates.

Earnings power is going to be less, but not damaged to the extent that the market is ascribing to the share price, said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, which owns GE shares.

While profit at GE Capital will not return to its pre-recession levels -- when the unit accounted for about one-half of GE earnings -- the company will be able return to a growth footing over the long term as long as its industrial units continue to function well, Klein said.

You can get earning power at the company to $1.30 to $1.50 (per share), and if that's the case, over the next couple of years the stock should probably trade into the mid-teens, Klein said.

BEAR CASE: CORE STILL STRESSED

However, given the brutal economy, there are no guarantees that GE's industrial businesses will be able to offset the weakness at GE Capital, bears on the stock argue. The severe downturn prompted fellow blue-chip industrial United Technologies Corp to cut its 2009 earnings target by 13 percent last week.

GE's industrial businesses are under duress, said Sterne Agee analyst Nick Heymann who rated the stock as sell with an $8 price target.

A global liquidity crunch is hurting demand for power generation equipment and will soon hit demand in the aerospace sector, while sales of its health-care technology are also likely to be hurt, he argued. GE's strongest industrial business is the locomotive unit, which is enjoying robust demand in Latin America, China and Eastern Europe.

GE's cable television and movie businesses are doing well, but its theme parks are hurt by the economy and the value of its NBC network and local stations is on the same trajectory as newspapers, Heymann said.

GE executives have managed to calm investors' anxieties in recent days, he said.

Expectations have now gone from fear to full-fledged hope, Heymann said, but the question of the size of GE's credit losses remains unanswered.

GE is likely to revise downward its 2009 profit estimate for GE Capital to about $2 billion to $3 billion, from its earlier prediction of $5 billion, he predicted.

That probably still would be pretty ambitious, Heymann said.

Unless we have a mechanism by which we can adjust to what the rest of the financial industry has done, by marking to market your impaired assets so your cost to finance will be less than what you earn in the portfolio, you haven't solved the problem, Heymann said.

(Reporting by Scott Malone and Nick Zieminski; editing by Patrick Fitzgibbons and Jeffrey Benkoe)

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