Wednesday, October 1, 2008

Deutsche Bank negative on GE

GE shares are down 1.50 to 24 and credit default swaps are up 65bp. Here is the analysts summary - Source Deutsche Bank Securities:

"GE's 3Q08 earnings call is at 8/30am on 10 October (800 329 9097)

Following last week's preannouncement, we have lowered our 2008E EPS
by 9% to $2 and now expect a further decline in 2009 to $1.95. Our
adjustments largely reflect deterioration at GE Capital- driven by
tighter credit markets, asset shrinkage and debt pay-down- but we also
eased back our Industrial assumptions. Valuation analysis indicates
that GE is fairly valued on an absolute basis but expensive on a
relative basis. Reiterate Hold vs. reduced $26 target.

Our 3QE EPS falls to 45c on Capital marks and absence of real
estate gains

The sting from GE's 3Q earnings result has been drawn by last week's
guidance reduction, which lowered the bar to 43-48c. Results will
likely be a split picture - Industrial growth could exceed 10-15%
guidance, driven by 35-40% growth at Energy Infrastructure, 10+%
growth at Technology Infrastructure and 5%+ growth at NBCU.
Infrastructure orders are likely to be up 10% implying huge Energy
bookings as Aviation should be sharply down. GE Capital expects to
incur $0.3-0.5bn of mark/market losses and substantially lower real
estate gains- our revised estimate calls for a 28% decline in GE
Capital segment earnings to $2.1bn.

We see another down year for Earnings in 2009

While there is further short-term downside potential to Capital
estimates, the market is more focused on 2009. As such, we now call
for an earnings decline next year, since we expect further 14c
reduction in GE Capital earnings, caused primarily by asset shrinkage
(5c) and de-leveraging (5c). We have lowered the GECS tax rate to 3%
since our analysis concludes that the GECS tax rate is unlikely to
rise (and could decline) until interest spreads widen and loss
provisions fall (2010/beyond). We have cut our 2009 Industrial
estimate by 7c on lower Aviation (flat aftermarket), adverse FX and
generally more conservative assumptions.

Lower earnings took our target price down to $26/share

GE is currently trading at ~30% premium to peers at 13.1x 2009E EPS
and commands a large premium to its $20 base case SOTP, meaning the
stock is vulnerable to negative sentiment related to Capital and
Infrastructure. The 5% dividend yield is an important support,
particularly in today's low yield environment. The industrial cash
coverage ratio for the $12bn dividend is tight, but the GE balance
sheet at 0.6x EBITDA has ample capacity to support the dividend and
bolt-on acquisitions while de-levering. Valn./Risks: We value GE's
Industrial business via DCF (8.8% WACC, 3% TG) and GECS at 1x NBV (see
p.18 for details). Key risk to downside is a shutdown in debt market
capital funding; to upside, more aggressive GECS portfolio

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