GEs report of lower earnings stunned the street but shouldn’t have surprised anyone familiar with the company.  Amongst light bulbs and appliances, GE has a huge credit portfolio from credit cards to car loans and even home loans.  GE money bank is one of the largest in the world and has huge exposure to the subprime industry.

Many store cards meant to be used in only one department store are issued by GEMB.  These cards generally have low limits (as low as $200) and issued to nearly anyone who applies.  Many of these card users are people without the credit to get an all purpose card or those who like to get the benefits of a store card.  Rarely do high credit score borrowers look for these kind of cards as they are known to lower the amounts you get from premium credit card issuers.   It is believed that American Express or other high end offerings don’t like to give cards to people with store card only experience.

While GE does lead the world in many different technologies, namely the compact fluorescent light bulb, the manufacturer has way too much exposure to the financial industry.  When most people think GE they don’t think banking, the stock was able to escape the financial sector bust but now the bill is coming due.

I wouldn’t consider owning GE for a variety of reasons, first and foremost being its exposure to the subprime lending industry.  If we do in fact go into a recessionary period, there are going to be even larger write-offs and lower expectations for the company.

Next is its huge market cap.  Even after shedding 12% of its value in just one day, GE trades at a market cap of $320 Billion.  To make any considerable amount of money, this stock has to build up a lot in equity.  A 10% gain would be a $32 Billion difference, to make 50% we’d have to see an increase in value of $160 billion.  As you can see, its just too hard to sustain such growth, especially when the stock already sells at a PE ratio of 14.   That’s a pretty high value for a company of this size.

In my opinion, GE has a lot more to lose at this point than it stands to gain.  Its likely that the subprime crisis will affect all parts of its business.  Lesser demand for its manufactured goods like refrigerators and air conditioners and failing payments in its credit division makes GE an even worse investment.  The worst part about the situation is that the company likely holds plenty of debt on its own products.

GE is a neither buy or sell at this point.  Economic outlook is rather bleak, so the company is unlikely to rebound any time soon.  Its credit division will certainly continue to take a beating, especially no secured credit cards and other personal loans.  If its manufacturing core does well, it will only help pare losses in the credit market.  No position, even at a 12% discount from yesterday.