GE oversold?

General Electric (GE) -7.76%

GE touched below $7 for the first time since 1993 as investors expect GE Capital will need more capital injections. Some estimates see GE’s balance sheet absorbing more than $10 billion in rising consumer credit delinquencies and falling real estate values outlined by the company.

GE Capital has a tangible common equity ratio (a measure of its ability to withstand losses against its total assets) of about 5.3 percent, which is at the high end of ratios amongst large commercial banks. GE Capital’s balance sheet would make the segment the 7th largest U.S. bank measured by assets. This is one reason investors are shorting the stock like other banks.

At least GE’s shareholders (40 percent of which are individual investors) don’t need to worry about the threat of nationalization like the nation’s large commercial banks. GE had $48 billion in cash on its balance sheet at the end of 2008 and can provide additional funds to GE Capital as needed. Of course, dipping into their giant cash pile increases the chance of credit rating downgrades. (Losing the AAA credit rating would not materially impact the company’s profitability, but the rating still carries tremendous psychological weight.)

While shareholders don’t need to worry about being diluted by government ownership, they will take a back seat to GE’s balance sheet when it comes time to decide where to allocate cash flow from operations – a big change from the recent past.

In just 2006 and 2007, GE repurchased $20.9 billion of stock and paid out $21.9 billion in dividends. This $42.8 billion in total value returned to shareholders is more than half of GE’s current market cap. Total GE buybacks and dividends over the past five years amount to over 100% of GE’s current market cap. The fact that such activity will now necessarily be greatly diminished has been weighing on shareholders.

Still, let’s not forget that GE has strong industrial business to offset its financial woes. A recent Credit Suisse report estimates that GE’s manufacturing business (in which they included infrastructure, industrial, and healthcare segments) alone is worth $14 to $15 a share. Given the current stock price, this implies losses at GE Capital would be at least $5 billion to $6 billion. This number seems excessive, especially when you consider that the company expects GE Capital to turn a $5 billion profit in 2009 (although it would not surprise me if this estimate is too high).

Looking into the future, GE’s manufacturing businesses are positioned for solid growth when the economy turns up. They are good franchises with leading market positions and many have high margin aftermarket revenue streams.

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Peter Lazaroff