Monday, July 23, 2012

GE: Troubled transnat

Ever since I read Kim Stanley Robinson's Mars trilogy, I've been fascinated by General Electric Co. Robinson makes much of the transnational corporations that dominate his fictional world at the start of the 22nd century. And GE, in this second decade of the 21st century, is about as close to a transnat precursor as we have.

GE has risen 2.5% intraday in today's trading following a earnings announcement before the opening on Friday that produced a not-too-impressive one cent upside earnings surprise.

And that's sort how things are with a transnat. It controls so much about its operating environment that it doesn't really have much in the way of surprises. Transnats are predictable as long as their environment is free from major shocks, or at least that's their goal.

Of course, our environment and GE's hasn't been free of major shocks over the last few years, not with the Great Recession scything through the economy.

GE has been churning sideways since mid-June in a range that, at the extremes, has run from $18 to $21. The range narrowed over the last nine trading days to around $19.40 to $20, with one upside breakout after Friday's earnings announcement that quickly retraced.

Today's price also pulled back from $20, which appears to be setting up as the challenge that must be met if GE is to rise.

GE is headquartered in Fairfield, Connecticut and has its fingers in a lot of pies, as transnats are wont to do: Applies, jet engines, consumer electronics, equipment for the electrical grid and for exploiting energy sources ranging from coal to oil to hydro, wind and nuclear.

It's a finance company, serving both businesses and individuals. It is big in medical tech, light bulbs (thanks to founder Thomas Edison), railroad management and water treatment. It's also a software company.

GE is the 3rd largest company in the world as calculated by the Forbes Global 2000. It operates practically everywhere in the world.

So the story fascinates me, but as a trader my job is to ignore the story and go to the heart of the matter: How can I make a profit over the next weeks and months.

Long term, GE has been in a sideways trend since late 2009. It set a high near $20 in early 2010, near $22 in early $2011, and then $21 in early 2012.

The two lows during this sidwinder have both bounced off of $14 or so.

A persistent break above $20 would potentially put GE in an uptrend, although it would take a break above $20.80 to nail it.

If $20 is the near-term challenge, then $22 is the level GE needs to break to begin an unambiguous uptrend on the longer-term charts.

But even without an uptrend, an options spread on GE can profit in a sideways movement.

So that's two chances out of three to make some money on this company, and that makes it worth considering.

General Electric reports return on equity of 11%, but with a huge long-term debt amounting to 3-1/2 times equity. The return is too low for a longer-term growth play and the debt is way too high for a value play.

Annual earnings fell in 2008 and again in 2009 as the global recession set in. The 2009 figures is less than half of that of two years earlier, before capitalist finance collapsed.

Earnings recovered very slightly in 2010 and a bit more in 2011, but the level in 2011 was 57% of 2007 earnings. If earnings remain on track, 2012 will also see a higher level but will remain far below the pre-recession level.

Quarterly earnings tend to remain fairly stable quarter to quarter. Of the last 12 quarters, 11 have shown upside earnings surprises and only one a surprise to the downside.

Analysts are showing 30% enthusiasm for GE, which seems fairly high for a company with such unimpressive financials. However, enthusiasm is down from 40% a month earlier.

Only 52% of shares are owned by institutions, which is pretty low for a household name. The price has been bid up slightly so that it takes $1.45 in shares to control a dollar in sales.

Bottom line on GE's financials: It may be a transnat, with lots of power and control, but it's a troubled transnat that has been unable to overcome the impact of the 2007/08 collapse.

Troubled or not, GE is one of the liquidity megastocks of the market, trading on average 51.7 million shares a day. It supports a good selection of options with high open interest very low bid/ask spreads.

Implied volatility stands at 25%, slightly below the six-month mid-range. It has risen sharply the last two trading days.

Options are pricing in confidence that 68.2% of trades will fall between $18.48 and $21.34 over the next month, for a maximum potential gain or loss of 7%.

Options are trading 24% above their five-day average volume, with puts showing slightly heavier relative volume than calls.

The price today is above the fair-price zone, which runs from $19.52 to $19.88 and encompasses 68.2% of trades surrounding the most-traded price, $19.70. The price is at the top of the five-day fair-price zone, which runs from $19.56 to $19.95.

General Electric next publishes earnings in October. The stock goes ex-dividend in September for a quarterly payout yielding 3.41% annualized.

Decision for my account: Given the fairly dismal financials, I'm not enthusiastic about GE at this time. A clear uptrend would change my mind.

From a story standpoint, GE's weakness is that it makes durable goods: Big, expensive items. These are the first things to go off of a buyer's budget when times turn tough. Given the uncertainty over a renewed recession, I see GE as something to stay away from at this point.

The thing is, with the financials as troubled as they are, I fear bad news, the sort of announcement or guidance that sends the price skittering down toward the cellar.

Fear is a bad drinking buddy for a trader. So I'm passing on the trade.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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