Goldman Sachs is upgrading General Electric (NYSE:GE) to Buy from Neutral with a $15 price target (prev. $13) as as comments reported after the close by US House Financial Services Chairman Barney Frank suggest broadening support for regulatory reform that would not mandate the separation of GE Capital. While numerous uncertainties remain, Goldman is reducing their probability assumption for a costly GECS separation to 25% from 50% and this drives their higher target. Greater potential for a manageable regulatory outcome should prompt investors to focus on longer-term benefits of economic and credit stabilization to GE shares.
Catalyst
After the close, Bloomberg reported that Barney Frank indicated that GE and “manufacturers with finance businesses should be allowed to keep the units under a revision to rules that govern banking.” This seems to strengthen the view that legislative support for reform requiring GECS separation as implied by the Treasury “White Paper” is declining. Goldman estimates separation could cost equity holders $40 bn (lower EPS on higher taxes, capital and other costs) and had assumed a 50% probability (now lowered to 25%) in their old $13 price target. While uncertainties remain and GE faces other challenges (e.g. later cycle industrial mix and rising credit losses), they believe that – along with economic and credit stabilization signs - risk/ reward is improved to justify upgrading their rating.
Valuation
The $15 12-month target assumes 1) $12 for Industrial on $0.85 mid-cycle EPS, 16x PE (vs. 14.5x prior on 25% lower probability of GECS separation), discounted 1.5 yrs at 10%, 2) $3 for GECS on $0.40 mid-cycle EPS, 10x PE, discounted back 2 years at 15%.
Notablecalls: What can I say. The stock will trade up on this by about 4-6% but the $15 tgt is really uninspiring. It's more about getting a blessing from GSCO than anything else.
Catalyst
After the close, Bloomberg reported that Barney Frank indicated that GE and “manufacturers with finance businesses should be allowed to keep the units under a revision to rules that govern banking.” This seems to strengthen the view that legislative support for reform requiring GECS separation as implied by the Treasury “White Paper” is declining. Goldman estimates separation could cost equity holders $40 bn (lower EPS on higher taxes, capital and other costs) and had assumed a 50% probability (now lowered to 25%) in their old $13 price target. While uncertainties remain and GE faces other challenges (e.g. later cycle industrial mix and rising credit losses), they believe that – along with economic and credit stabilization signs - risk/ reward is improved to justify upgrading their rating.
Valuation
The $15 12-month target assumes 1) $12 for Industrial on $0.85 mid-cycle EPS, 16x PE (vs. 14.5x prior on 25% lower probability of GECS separation), discounted 1.5 yrs at 10%, 2) $3 for GECS on $0.40 mid-cycle EPS, 10x PE, discounted back 2 years at 15%.
Notablecalls: What can I say. The stock will trade up on this by about 4-6% but the $15 tgt is really uninspiring. It's more about getting a blessing from GSCO than anything else.
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