GE’s Ratings Rally: Where Does The Stock Go Now?

You would think a ratings downgrade would send General Electric (GE) reeling.

Think again.

In midday trading, General Electric was up 11.54% to $9.47.

Since 1956, General Electric has carried the platinum standard in the credit markets: a triple-A credit rating from Standard & Poor’s. On Thursday, GE was nudged off that perch when S&P downgraded GE’s long-term ratings to AA+. But since the ratings downgrade was widely anticipated—S&P revised GE’s outlook to negative in December—the investors and analysts I spoke to Thursday say they breathing a bit easier. Tom Uutala, an equity analyst at Victory Capital Management in Cleveland, says he is encouraged to see that S&P’s “carefully worded” ratings report offered a stable outlook for the company. And S&P only downgraded GE by one notch to AA+, instead of two notches, he notes. “One of the headwinds we knew was coming is now behind us,” Uutala says. “We move forward from here.”

At Hardesty Capital Management in Baltimore, just about every client at the investment advisory firm owns GE stock, according to David Stepherson, a portfolio manager at Hardesty, which manages $600 million. “The only people who thought GE was a triple-A credit was the ratings agencies themselves,” Stepherson says. (GE still has a triple-A rating from Moody’s. A spokesman promised to let me know if a ratings action takes place.)

Chris Armbruster, senior research analyst at Al Frank Asset Management, a value-based asset management firm in Laguna Beach, Calif., doesn’t expect Moody’s to do much damage. The wildcard is whether Moody’s cuts GE’s credit rating by three notches. If that happens, it should trigger capital covenants requiring the company to post more capital, Armbruster says. That is a huge “if.”

And to those of you (you know who you are) who think S&P was too slow to cut GE’s rating, S&P analyst Bob Shulz has this to say: “There are a lot of moving parts in the capital markets these days, especially post-Lehman’s failure. Our ratings reflect an analysis of the business and the financial risk.” (S&P, like BusinessWeek, is owned by the McGraw-Hill Cos.)

S&P believes the economic environment is worsening, Schutz says. GE’s stable credit outlook reflects S&P’s belief the industrial side of the company will still generate a substantial amount of cash. “The stable outlook doesn’t mean financial outlook will be stable, but we believe performance will be consistent with the rating,” he says.

So where does GE go from here? Hardesty’s Stepherson has a long-term price target for the stock at $26. Within the next 12 months, “$16 is reasonable,” he says.

Next week GE will hold an analysts’ meeting. Some of the burning questions Armbruster and other experts I spoke to would like answered include:

1) What GE look like five years from now?

2) Does GE own NBC five years from now?

3) What is the outlook for GE’s healthcare business?

4) How will the economic slump impact GE’s industrial businesses?

5) And, most important, what is lurking inside does GE Capital’s portfolio?

What issues would you like GE to address at its analysts’ meeting? What are the hard questions you would ask the company?

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