General Electric Co
With financial companies around (the) world under increasing pressure and governments injecting funds into multiple financial institutions, we think investors have rightly questioned managements' forecast and planning assumptions that continue to seem too optimistic and out-of-step with the environment, wrote Merrill Lynch analyst John Inch, in a note to clients.
BernsteinResearch analyst Steven Winoker wrote that, while he thinks GE will need to mark down the value of its financial portfolio over time, he does not see an immediate and large writedown as likely.
Probably the biggest controversy surrounding GE right now is what the fair value of (GE Capital's) $661 billion is if/when a write-down to fair value should occur, Winoker wrote in a note to clients.
He estimated that parts of GE could be overestimating the value of some of its assets -- for example, he calculates that its real estate equity is worth about $20 billion, rather than the $32.7 billion GE estimated it at the end of the year.
But he saw no need for immediate action.
We think such write-downs, if needed, would be spread over several years, which will lessen the need for equity raises, but will hurt long-term earnings, Winoker wrote.
Inch, of Merrill Lynch, wrote that he considered it unlikely GE would have to raise additional capital -- a step the company has repeatedly said it regards as unlikely. But he warned that if that changes, GE may it find it difficult to raise substantial money in equity markets due to its low stock price.
He noted that if GE Capital did face a funding crisis, he believed it would be likely the U.S. government would step in to block a bankruptcy filing or a spin-off, given the lender's huge role in the U.S. financial system.
Investors cannot assume that the risks of a future government bailout of GE Capital are zero, Inch wrote.
Merrill Lynch cut its 2009 profit target for the Fairfield, Connecticut-based company to $1.16 per share, below his prior view of $1.32 but more in line with Reuters Estimates of $1.19, which would represent a roughly 38 percent drop on a per-share basis, excluding unusual items. It cited the deteriorating economy.
GE, which also runs the NBC Universal media business, has not provided a numeric per-share profit target for the year, instead setting out a framework that allows for a drop in profit at GE Capital but modest growth at its big infrastructure businesses.
Another question facing GE is what will happen to its current top-notch credit rating. Many on Wall Street expect Moody's Investors Service and Standard & Poor's to cut GE's triple-A.
GE's chief financial officer and noted bond investor Dan Fuss of Loomis Sayles said on Thursday they believed any cut to GE's rating would keep the company in the double-A range.
If its rating was lowered further, to A+, Winoker estimated GE would be on the hook for an $8.2 billion collateral call. A far deeper cut, to BBB+ would mean another $2.9 billion payment.
GE shares rose 36 cents to $7.02 on the New York Stock Exchange. Earlier this week they hit an 18-year low of $5.87. They have traded as high as $38.52 over the past 52 weeks.
The cost of insuring GE Capital's debt through credit-default swaps declined on Friday, according to Phoenix Partners Group. Investors were paying 15.5 percent upfront, meaning that it required an immediate $1.55 million payment plus an additional $500,000 per year to ensure $10 million of GE debt for five years. At Thursday's close they had stood at 16.5 percent upfront.
(Reporting by Scott Malone, additional reporting by Dena Aubin in New York, editing by Dave Zimmerman)