Although General Electric (GE) remains one of America's best-known brands, on Wall Street its shares have about as much appeal these days as a burnt-out lightbulb. But the industrial giant's outlook could be set to brighten if America's most famous investor buys a stake in the company.
Some Wall Street analysts think Warren Buffett is preparing to put his money on GE, the Dow's worst-performing stock in the first quarter. The famed "Oracle of Omaha," whose gold-plated reputation for spotting value where others don't has long helped breathe life into ailing companies, said earlier this year that he would consider investing in GE if the price were right.
As rumors circulated that Buffett is discussing a deal with GE's management, the company's stock price jumped this week by the most in two months. Said Scott Davis, an analyst at Melius Research, in a note to clients on Wednesday: "[B]ased on years of following Buffett, when there's a leak to the press related to him, it usually ends up being largely correct."
Assuming talks don't falter, an announcement could come any day, added Davis, who believes Buffett's Berkshire Hathaway (BRK.A) could take an equity stake in exchange for taking on most of GE's excess liabilities from its residual insurance business. That would help GE stabilize its credit and improve its cash-flow, giving it room to breathe.
It wouldn't be the first time Buffett took a chance on GE. He invested $3 billion in the company in October of 2008 as the financial crisis was intensifying and as GE was reeling as credit markets froze. He has since sold the bulk of his holdings in the company, Buffett said in January.
Although GE gradually climbed its way out of a hole following the recession, its results in recent years have been decidedly lackluster. Among its chief problems: dwindling demand for its gas turbines, earnings far below already lowered estimates, and a cash shortage that prompted GE to halve its formerly inviolable stock dividend. Adding to its woes, the company disclosed in January that it faces a probe of its accounting by securities regulators.
GE chief John Flannery, who took over for long-time, has said the company is looking at all strategic options to boost results. That includes breaking up the conglomerate, which offers financial services as well as making jet engines, turbines and medical equipment.
Indeed, an injection from Buffett could signal that "things are even worse at GE than we think," said Jeffrey Sprague, an analyst at Vertical Research Partners, who expressed doubt Buffett will invest.
But "If Mr. Buffett comes in here and does something, he's not doing it out of the kindness in his heart. Like his investment during the crisis, he's going to extract good terms. Basically, GE would be selling low to get liquidity."
On the positive side, he added: "if they do have a desperate need for cash and get it, it limits the downside."
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