Wall Street analysts who cover General Electric Co. faced a quandary this week: side with the management of the world's biggest company or with the manager of the world's biggest bond fund. They chose the former.
General Electric shares dropped for the week after Pacific Investment Management Co's Bill Gross sold US$1 billion of General Electric Capital Corp's short-term IOUs. Gross, whose firm is a unit of German insurer Allianz AG, said GE Capital's debt level was extreme and its parent company didn't provide enough details about how it makes money.
General Electric's CFO, Keith Sherin, countered by saying the company will do "whatever it takes" to reassure investors.
Of the 22 analysts tracked by Bloomberg who cover General Electric and recommend purchasing shares, none changed his or her rating. Four analysts rate GE a "hold," and one says "sell."
"Analysts sort of look at the business, and if nothing has changed and the price has gone down say, `Maybe I should like it more than I did a few days ago,'" said William Batcheller, who helps manage the US$800 million Armada Equity Growth Fund, which holds General Electric shares.
Credit Suisse First Boston analyst Michael Regan rebutted Gross in a report today titled "The Time is Right to Take More Aggressive Positions in GE."
He called some of Gross's comments "egregious" and repeated his "buy" rating on GE. Regan couldn't be reached for comment.
Salomon Smith Barney Inc.'s Jeffrey Sprague, Bear Stearns & Co's John Inch and ABN Amro's Todd Hinrichs also stood by their "buy" ratings in reports after Gross made his comments.
The stock fell 2.8 percent last Wednesday after Gross, whose firm manages about US$250 billion, spoke out. GE shares fell another 3.5 percent yesterday.
General Electric, which has a market value of US$376 billion, owns the NBC television network and makes turbines for power plants. GE Capital is the world's largest non-bank finance company.
GE also makes an average of 100 acquisitions a year, generating lucrative fees for Wall Street firms.
Analysts have been criticized for not lowering their ratings in an effort to win or keep companies' investment-banking business. Such barbs intensified last year after analysts kept "buy" ratings on Enron Corp even as the energy trader spiraled toward the largest US bankruptcy filing.
While fund managers often sour on brokerage firms' ratings because of the potential investment-banking conflicts, several agreed with Credit Suisse's Regan and Salomon Smith Barney's Sprague. Salomon Smith Barney and Lehman Brothers Holdings Inc managed an US$11 billion bond sale for GE last week.
"GE is as financially strong as they get, and this shall pass," said Henry Cavanna, who manages about US$7 billion for JP Morgan Fleming Asset Management and owns GE shares.