Banc of America Bucks Trend on GE: Call of the Day (Update1)
By Perri Colley McKinney
New York, April 12 (Bloomberg) -- Banc of America Securities LLC analyst Nicole Parent advised investors to slow purchases of General Electric Co. stock -- only the second downgrade in four years for shares of the largest company by market value.
Some investors said it's no surprise analysts have avoided cutting their ratings given the investment-banking fees GE generates with an average of 100 acquisitions annually and bond sales expected to total $50 billion through the rest of 2002.
What is surprising, they say, is that a bank arranging a $15 billion credit line for General Electric lowered its recommendation on the stock.
``It's a pretty gutsy call,'' said Wendell Perkins, who helps manage $600 million at Johnson Asset Management in Racine, Wisconsin. ``Who wants to upset the world's largest company?''
Parent said in an interview that a decline in GE's power business won't be offset by growth in other areas. The 30-year-old analyst, a former assistant to Jeffrey Sprague of Salomon Smith Barney Inc., cut GE to ``buy'' from ``strong buy'' and said it isn't likely to rise above $36 in the year ahead, down from a previous estimate of $45.
General Electric slipped 20 cents to $33.55 today. Shares slumped 9.3 percent yesterday after the company said net income fell for the first time in more than seven years. The stock reached an all-time high of $59.88 in September 2000 and has since fallen more than 44 percent.
`Tied Into Banking'
``The stock has dropped from $60 to $30, and where have all the analysts been?'' said John Kornitzer, who manages more than $3 billion at Kornitzer Capital Management in Shawnee Mission, Kansas, and decided against buying GE shares even after yesterday's plunge. ``The problem is the analysts are tied into the investment banking and therefore they aren't giving the investor the true picture.''
Five Wall Street analysts repeated ``buy'' or ``strong buy'' ratings on GE today: Bear Stearns & Co.'s John Inch; Prudential Securities Inc.'s Nicholas Heymann; Merrill Lynch & Co.'s Jeanne Terrile; Lehman Brothers Inc.'s Robert Cornell; and Salomon's Sprague, the top electrical-equipment analyst in Institutional Investor magazine's 2000 and 2001 surveys of money managers.
Of the 24 analysts tracked by Bloomberg who follow General Electric, 18 rate it ``buy'' and five say ``hold.'' Only one firm -- Germany's Hauck & Aufhaeuser -- recommends selling.
The only other rating cut since 1999 was by A.G. Edwards & Sons Inc., which in November lowered its rating to ``buy'' from ``strong buy,'' according to Thomson Financial/First Call.
When Morgan Stanley Dean Witter & Co. overhauled its rating system last month, it listed General Electric as ``equal weight/cautious.'' Previously, it was a ``strong buy.''
J.P. Morgan Chase & Co., Morgan Stanley and Merrill Lynch have most often advised GE on its mergers and acquisitions, while Salomon is its biggest bond underwriter, according to Bloomberg data.
J.P. Morgan rates the stock long-term ``buy.'' Morgan Stanley rates it ``equal-weight/cautious,'' or ``hold.''
GE Credit Line
Banc of America, J.P. Morgan Chase and Citigroup Inc., parent of Salomon Smith Barney, are helping General Electric secure its credit line.
GE, based in Fairfield, Connecticut, is the nation's fourth- largest bond issuer, with $34 billion in outstanding debt, according to Lehman. It plans to sell about $25 billion of bonds this quarter and analysts expect about $50 billion or more to be sold through the end of the year.
Owning GE stock has been a good bet. Profit rose for 20 consecutive years under former chief executive Jack Welch, with the shares averaging an annual return of 24 percent. Since Jeffrey Immelt succeeded Welch in September, shares have fallen 15 percent.
``It's done a darn good job over the past umpteen years,'' said Noel Dedora, who helps manage $7 billion at Fremont Investment Advisors in Alamo, California.
Dedora said today's downgrade may have been more the result of scrutiny of brokerage analysts than good research. Fremont owns GE shares and has added to its position as the stock has dropped, Dedora said.
`Under Fire'
``The analysts are coming under increasing fire from everybody -- that has something to do with'' this call, Dedora said. ``The analysts are going to take every opportunity to downgrade, and who wouldn't? There are times when GE should be downgraded but maybe this isn't one of them.''
He expects GE to outperform the Standard & Poor's 500 Index this year and next, as the rebounding economy helps the company's economically sensitive businesses, such as plastics, make up for losses in other areas.
Parent disagrees. The 1993 Harvard College economics graduate said General Electric's earnings growth will slow to 9 percent in 2003, from a previous estimate of 10 percent, because of a slump in its power business and slower growth in medical and materials businesses, she said. She expects 10 percent earnings growth in 2002, down from 11 percent in 2001.
``GE has traditionally been a 15 to 17 percent grower,'' but that is changing, Parent said. ``Earnings will be up in 2002, but the question is how bad and how fast will they deteriorate in 2003.''
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