Will GE Make You Money in 2012?
GE (NYSE: GE) has been a frustrating stock for investors over the past few years. The company is trading more than 50% off its pre-recession highs and even fell low enough for Warren Buffett to take notice. While Buffett was able to generate a nice return through dividend payments and loan interest, regular investors have not been so lucky. Its stock has seesawed from the mid-teens to the low 20s over the past year, making it difficult for investors to properly time an entry to capture the 3.8% yearly dividend.
One department of GE that has the potential to drive revenue growth in the near term is GE Capital. The department made a preemptive expansion drive in the final week of 2011, acquiring the retail deposit business of Metlife (NYSE: MET). "This acquisition fits with our plans to launch a U.S. deposit platform," said Dan Henson, CEO of GE Capital. "It accelerates our timing, helps us build a stronger and more cost efficient funding base, and allows us to better serve our customers. These new capabilities provide an excellent engine for future growth."
The company has significant opportunities to grow its assets and cash position. GE has nearly $620 billion in loans and bonds that are due in 2012, more than any other U.S. company. The company also has $78.7 billion of notes maturing. The ability to remove these payables from the balance sheet are important as many analysts forecast that borrowing costs will rise next year from record lows this year.
A note from Sterne Agee commented on GE Capital's prospects for 2012. "The negative view and misconception on GE Capital is that it deserves a multiple discount like the large cap banks, and that Europe could cause it to fail. We would highlight that GE Capital has no U.S. residential mortgage exposure, is actively shrinking its loan book while U.S. banks try to do the opposite, has no trading platform, and has de-risked the funding model considerably. Is Europe a threat? With $132B in receivables that are 85% collateralized, and GE Capital currently reserved at 96% of prior peak losses, we do not view a non-cash charge to the balance sheet or income statement as a deal-breaker if losses and impairments were to go up."
GE has not been an exciting stock for some time, however the potential of GE Capital could provide a diversification opportunity for investors who are weary of buying traditional financial companies such as Citigroup (NYSE: C) or Bank of America (NYSE: BAC). The addition of a yearly 3.8% dividend and the fact that the stock is still trading in the teens further increases GE's potential for a nice return. Investors are looking for large cap companies that can generate some kind of return, and GE could be a good bet for that in 2012.
Traders who believe that GE Capital will provide growth to the company's bottom line will want to consider these trades:
- Go long shares of GE. Shares are still trading near 21st Century lows and could have room for upside in 2012.
- Go long financial companies such as J.P. Morgan (NYSE: JPM) and Wells Fargo (NYSE: WFC). As borrowing costs increase, banks could find new revenue opportunities.
Traders who believe that GE Capital will suffer from the same difficulties that have plagued financials for the past few years should consider these trades:
- Go short GE. GE Capital faces many of the same challenges that financial firms do, such as efficient capital allocation and asset management. If GE Capital cannot capitalize on opportunities in 2012, GE's revenue growth could suffer.
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