Shares of General Electric (GE, $27.59, up $0.19) hit a 52-week low yesterday before rebounding to close in positive territory. The stock hit a new low of $27.20 and is now down 25% for the year. GE has been in a major downtrend since announcing crappy 1Q earnings back in April. The stock was at $36.75 before their April announcement and fell $4.70, or 12%, the day they reported on volume of 366 million shares.
The big issue with GE is that in mid-March it had reaffirmed previous 1Q and yearly earnings guidance before dropping the “disappointment bomb” on Wall Strret. Not only did GE miss 1Q earnings ($0.44 versus expectations of $0.51), they said full-year earnings would be well below what they had forecast.
GE gets half its profits from financial services unit, GE Capital, which was where earnings took a hit. Most figured GE had kept the subprime damage in check but when earnings were revealed this division accounted for $0.05 of the $0.07 on the miss. The company rarely misses its numbers and many on Wall Street were stunned at just how far off GE was from estimates.
GE makes a variety of energy products and that will be the key driver of earnings over the next few years. The company is enjoying double-digit growth from the Infrastructure division but other areas have been “soft”. GE is still treading water and it may be a little too early to put the toes in the water. The company will be reporting earnings in the next 2-3 weeks and all eyes will focused on their numbers.
Like I said before, I’m not ready to purchase any call options on the stock just yet but I am watching the 2009 January 30 calls (VGEAF, $1.25, up $0.10) and the 2010 January 30 calls (WGEAF, $2.67, up $0.10). It may take a quarter or two for the company to gain Wall Street’s trust back but this stock is getting pretty cheap. Besides trading at a five-year low, the stock is sporting a juicy 4.5% dividend.
GE’s price/earnings ratio is under 13 and its price/book value ratio is a little over 2x. These ratios often help determine whether a stock is undervalued or overvalued. The higher both are compared to other stocks means the stock could be overvalued. A lower P/E or P/B could be mean the stock is undervalued and that appears to be the case with GE right now. However, I still don’t believe the stock is out of the woods just yet and I will also be watching to see what GE says when it reports earnings in July.
Rick Rouse
Rick@OptionMentoring.com
