GE Valueline Outlook

We have moved General Electric to a new industry. The stock was previously included in the Electrical Equipment group, but will now be included in the Diversified Company group. We believe the current designation better reflects GE’s well-diversified business.
Although our most recent review was only two weeks ago, a lot has happened since then. First of all, the company released its June-period financial statements.
Revenues rose 11%, led by the Infrastructure segment, where the top line advanced 26%. However, the Industrial segment felt the effects of the soft U.S. economy. Indeed, sales increased a modest 2%, while higher costs caused operating profit to fall 32%. Also, the company announced that it is considering spinning off the entire Consumer and Industrial segment.
Indeed, management has already stated its desire to shed its appliances operations, but now wishes to spin off the segment’s other two subdivisions (lighting and industrial) as well. Lastly, GE announced that it was selling its Japanese Commercial Finance division to Shinsei Bank for $5.4 billion. The company did not specify what it plans to do with the sale proceeds.
We think earnings will be flat this year. The struggling economy should make operating conditions difficult through year’s end. Although the Infrastructure segment will probably continue its recent run of strong performances, weakness in other areas of the company will probably weigh on the bottom line. However, we think earnings will rise at a 9%-10% clip in 2009, thanks to an increased focus on industries with stronger fundamentals. Too, international operations should provide a nice cushion from the rocky domestic economy, especially in high-growth emerging markets.
We like these neutrally ranked shares for the long haul. At its recent quotation, GE offers above-average capital appreciation potential over the coming 3 to 5 years. Too, the stock carries our Highest (1) Safety rank, as well as excellent ratings for Financial Strength, Price Stability, and Earnings Predictability. All told, we see a very attractive risk-reward scenario here.
Tom Nikic July 25, 2008


2011-13 PROJECTIONS
------------------------------------------------Ann’l Total
------------------------Price------- Gain------- Return
High -------------------70--------- (+165%)---- 29%
Low------------------- 55--------- (+105%) ----22%