GE CFO on ‘Squawk’: Analysts
fear calling stock ‘undervalued’
Posted Thursday, March 5, 2009
General Electric CFO Keith Sherin suggested Thursday on CNBC that some analysts tell him the stock is "undervalued" but "have trouble making that call" because they say their "job's on the line."
CNBC has likely spent more airtime discussing General Electric this week than it has in the entire last 10 years.
In yet another watershed day of coverage of its parent company, anchors and reporters first interviewed Sherin on "Squawk Box," then evaluated his comments on "Power Lunch."
Sherin's appearance on "Squawk Box" was relaxed and, while not particularly illuminating, as candid as these things often get with any company's executives.
The coverage was sound. The questions were tough and unsparing, especially from reporter David Faber, who clearly brought his A game — and game face. But Joe Kernen was inclined to give Sherin extraordinary latitude.
CNBCfix kept track of time. The interview lasted 22 minutes. It was exactly 20 minutes into the interview when Faber asked Sherin if he believed short sellers were deliberately creating an artificial panic to bludgeon the stock.
CNBCfix does not know this answer. The fact this question came so late, after so many others, that it wasn't initially raised by Sherin, and that Sherin "didn't take the bait" (as Faber said later) suggests neither Faber nor Sherin gives this angle significant credence.
Joe Kernen asked Sherin, "All right, the market's worried about something. Obviously. Um, what, what do you think it is, and is it justified?" (Quotes are verbatim for the sake of completeness on this important subject; excerpts taken.)
"Well I think we're getting a lot of speculation about the risk in GE Capital obviously," Sherin responded. "And uh, I think it's overdone. ... we have an incredibly strong liquidity position ... I think that credit, uh, volatility is overdone."
Kernen: "Will GE Capital, uh Capital, be profitable in the first quarter."
Sherin: "GE Capital's gonna be profitable in the first quarter."
Kernen: "It will be profitable" (as a question).
Sherin: "It will be profitable. You know we, we put, uh,—"
Faber broke in: "That's not a result though of not taking losses? (Sherin smiles) I mean this is, you know, again where critics will say it'll be profitable because you guys are ultimately not taking the marks you should be on some of these positions."
Sherin: "We have to, obviously, follow the accounting rules ... as we see higher delinquencies as we see more defaults on both the commercial and the consumer side, we're gonna put up higher provisions ... I don't see a need to put additional capital in GE Capital."
Michelle Caruso-Cabrera: "The market does seem very worried though still about the asset quality that you've got, the uncertainty about the asset quality, and the market's telling you that."
Sherin: "Sure."
Caruso-Cabrera: "Is there any way to wall off GE Capital so that you can defend the rest uh, of the portfolio against any kind of losses that would be there?"
Sherin: "I, I think we, uh, have to deal with whatever the losses are in GE Capital. I don't think there's a silver bullet to wall off those losses. I, I think one thing we have to do obviously in this environment is be more transparent. ... We have fantastic businesses in Eastern Europe..."
Caruso-Cabrera: "But it's precisely because of that. Those economies in Eastern Europe are crumbling right before our eyes."
Sherin: "Sure they are ... (But) it's not uh, uh, a lightning bolt, cliff, event for us, it's not uh, you know, a time bomb. And what — I was getting to the point about transparency, I mean we recognize the need to be more transparent here I—"
Faber: "More than you worried on December 2nd ... when you gave a fairly detailed presentation—"
Sherin responded, "It's like December 2nd never happened David. We had a really great meeting ... two months later that's not enough. So what we're planning on uh, the week of March 16th, we're gonna have a GE Capital meeting again. Our intent is to do a deep dive around the hot spots in the company."
Sherin would add, "I think it's possible we could end up in a Double-A, and uh, it's possible we could end up with a Triple-A with a continued negative outlook."
Asked by Faber about short selling, Sherin responded: "Can I say we're in a negative news cycle ... I don't know if there's manipulation." The farthest he would go was: "I'm disappointed in the quality of some of the speculation."
Kernen mentioned analysts, but somehow under the guise that Sherin and GE — rather than investors — might not have been treated fairly by the analyst community because analysts had "universal buy ratings at 35 and 40, and I don't know if you have a buy rating at 6." Sherin said analysts tell him, " 'I think you're undervalued. I have trouble making that call because my job's on the line.' That's a tough spot for people to be in."
If taken literally — and we're going to give Sherin the full benefit of context — it could be interpreted as suggesting analysts are being untruthful because they fear getting fired, a significant implication. But this site will take the position that, given when the comment occurred in the interview and the way Sherin expressed empathy, he was not accusing analysts of untruthfulness. This site's position is that if an analyst believes GE is "undervalued," he or she should say so. If an analyst is merely inclined to think so and says so to someone like Sherin, yet perhaps cannot justify such an opinion on paper, then lack of an upgrade is justifiable. (This writer is not an expert on analyst legal and ethical standards and has never been a financial analyst.)
According to Yahoo Finance, as recently as Feb. 6, 2009, Bernstein initiated GE at "market perform." Under "Upgrades and Downgrades," the previous seven moves were all downgrades, dating to June 21, 2007. Those downgrades were made to these levels, listed in order from most recent: "Neutral. Hold. Neutral. Peer perform. Perform. Neutral. Long-term Buy."
Later Thursday, CNBC's five-person panel on "Power Lunch," including Faber and Caruso-Cabrera, took up the details in a roundtable chat on GE.
Caruso-Cabrera: "Look we've heard before, 'We're not gonna cut the dividend' — we've heard from so many companies, no additional capital and we asked him about this, about credibility issues, and they said they've gotta work harder at that to be more convincing."
Faber: "It does seem — he wouldn't say but it does seem certainly possible if not likely that it will get downgraded at some point."
Dennis Kneale, who CNBCfix finds amusing because of his relentless market optimism but who often ridiculously pushes this zeal against overwhelming evidence, questioned if a downgrade would really matter: "About that downgrade ... really GE's cost of debt is going up anyway."
Sue Herera, a longtime and very highly respected face on CNBC, said essentially what Bill Gross told CNBC Wednesday, "It's factored in ... they're looking for it."
"Double-A would not do much of anything," Faber agreed, at least on a technical level.
Bill Griffeth, another CNBC legend and highly respected anchor, said this: "Here's a question I've got ... I'm just a cable anchor, I'm not the CFO of, of, of General Electric, but the, the, the issue I hear most often, a concern, a fear, whatever it is, is the lack of provisions, the lack of reserves being put into place to get ready for any potential losses even as the markets deteriorate especially in the cre-, uh, the commercial real estate market here. Why not just bolster up the reserves even more than they already have if perception becomes reality. I know that they're very conservative in how they account for things. They're very conservative in leveraging and so forth, but the perception is that they are not provisioned enough in the reserve category."
Faber: "They would say, 'Listen, we've already done that.' "
Herera: "The market just does not have confidence. Period. And why should it?"
Faber: "Why should it. Has there been any reason? There's been no bottom."
Kneale though wasn't done asking if GE's slide might be the result of chicanery. "I get the clear feeling that senior GE guys feel like there's some kind of manipulative conspiracy going on on the part of swaps sellers and short sellers. I mean am I overreading that?"
Faber: "Well he didn't take the bait. I mean listen, there is this idea out there that you can create a climate of fear that you can benefit from if you blow out the CDS spreads which doesn't require that much in terms of buying power, uh, ultimately short the stock and buy the out-of-the-money puts."
Caruso-Cabrera: "He did say it was very small volume in the CDS, only 35 million, much lower than average—"
Kneale: "Which is why it can just go up by 100 points."
Herera closed: "But it's the perception. It's the perception when you look at those numbers, and you're now required to be upfront on your payment on the CDSes. It's the perception that it's created that makes it difficult."
After the closing bell Thursday, Melissa Lee, managing editor Tyler Mathisen and Caruso-Cabrera took up the subject of GE again, if briefly.
CNBC is quickly making up lost ground in General Electric reporting. There are still instances, such as Kernen's question after Sherin's interview as to whether traders were responsible for "untruths floating around" to push down the stock, Kneale's comments and a disclaimer from Faber in his report Wednesday, of giving the company perhaps a bit too much latitude that people on CNBC generally do not give other companies. (This writer has never had a position in GE stock or options, long or short, is not a financial analyst trained to analyze companies, and is not an expert on markets.)
But the "Fast Money" panel of actual traders has clearly been unleashed, and (most of them at least) have made startlingly candid assessments of the status of GE. The anchors are not at that level but are mostly keeping it real. It is strongly believed by CNBCfix that the network and GE are easily best served by letting its personalities freely discuss and, in the case of trader panelists, even take positions in the stock or options as "Fast Money" traders have done. The embarrassing comments heard on the network Friday and reported at CNBCfix are no longer indicative of the network's coverage of its parent company.