GE stock: Bargain or a bad choice?

WASHINGTON (AP) — General Electric Co. was long trusted as the gold standard of safe investing. Retirees loved its dividend — which hadn’t been cut since the Great Depression — and cautious stock pickers admired its arsenal of goods that people bought, even in bad times.

Now, due largely to problems in its finance unit, shares of GE trade at less than $10, down nearly 75 percent in the past year, and nearly 90 percent since their peak in 2000. The stock’s plummet traces a year of disappointments for this blue-chip stalwart: a surprise slowdown in earnings, the first dividend cut in more than 70 years and an industrial powerhouse struggling with some of the same problems as Wall Street banks. And yet, GE still makes light bulbs and jet engines and plenty of tangible things that people need to buy.

So is GE stock the bargain of a lifetime, or a case of buyer beware?

If you consider GE first and foremost a big industrial company — maker of everything from home appliances to ultrasound machines — its stock trades at a slight discount to peers. That’s based on its price-to-earnings ratio — a common measure for how investors value a company’s earnings power.

But if you see GE as a financial company, there are plenty of reasons to worry. Its big lending arm, GE Capital, is facing the threat of unpaid loans, sharply lower earnings, and even bigger losses on its balance sheet. That’s what’s driving the stock down.Here’s why GE’s shares look like a bargain:

Last year, GE’s profits topped $18 billion, even as the biggest recession in more than 20 years pummeled the bottom lines of other industries like finance, steel, retail and home builders. Those earnings ranked as GE’s third best in its 130 years of existence. And it may yet squeeze out a profit in 2009.

So even though investors have sold off GE as if it were financial stock, it’s not posting the big losses at banks such as Citigroup Inc. and Bank of America Corp.

GE says its industrial businesses’ earnings may grow up to 5 percent this year, even in a huge recession. GE’s backlog of orders totals $172 billion for infrastructure projects, an area President Obama touts as a top priority for reviving a beaten down economy

GE is the “Cadillac business” in many of those markets, said Peter Sorrentino, senior portfolio manager of Huntington Asset Advisors. And its green energy technology, like wind turbines, could help it benefit from the $787 billion economic stimulus bill.

The conglomerate is restructuring GE Capital to reduce risk, trimming its debt-to-income ratio by a quarter and reducing its holdings of risky debt. And it is slashing an unspecified number of jobs at GE Capital to save money.

Unlike struggling automakers or banks, GE hasn’t taken any federal money despite GE Capital’s problems, though it has used government programs that make it easier to issue debt.

Here’s why buyers should beware:

GE Capital makes loans for everything from credit cards to power plant construction. It once made up about half of GE’s overall earnings. Many analysts and portfolio managers say there are way too many unknowns about GE Capital’s $660 billion in assets and whether there are big write-downs looming on loans gone bad.

GE has devoted $15 billion to propping up the lending unit and is fighting speculation it will need to inject more this year. Investors worry about possible big losses at GE Capital commercial mortgage business, though GE has said the rumors are overblown and that it expects a profit in 2009 at GE Capital.

“Everyone is worried there are some massive hits that are going to be taken there,” said William Batcheller, director of investment management at Butler, Wick and Co., which owns 660,000 GE shares.