Investing

General Electric would be an ‘ideal Warren Buffett investment,’ RBC says

Key Points
  • RBC Capital Markets says Warren Buffett may invest in General Electric, but could extract a high price for his involvement.
  • "In many ways, GE's current situation fits the profile of an ideal Warren Buffett investment," the firm's analyst writes.
Warren Buffett
David A. Grogan | CNBC

Warren Buffett may come to the rescue of General Electric once again, according to one Wall Street firm.

RBC Capital Markets analyzed whether it made sense for Buffett to invest in GE at these levels.

General Electric's stock rose 4.3 percent Tuesday amid unsubstantiated speculation that the Oracle of Omaha was buying shares of the beleaguered industrial conglomerate.

The company's shares have significantly underperformed the market. Its stock has declined 55 percent in the past 12 months through Tuesday versus the S&P 500's 11 percent return.

"Berkshire Hathaway has a history of investing in storied businesses struggling at steep valuation dislocations. In many ways, GE's current situation fits the profile of an ideal Warren Buffett investment," analyst Deane Dray wrote in a note to clients Tuesday. "GE is a 125-year-old iconic industrial brand with strong assets, market leadership in many industries, and a business model that Mr. Buffett understands."

Dray noted Buffett's Berkshire invested in GE's preferred shares during the heart of the financial crisis in October 2008. But Dray warned if he does invests in the company again, it will likely come at a high price for GE.

"We caution that any investment by Mr. Buffett would potentially be 'expensive capital,' as he is likely to extract favorable terms from GE," the analyst wrote. "In effect, this Berkshire investment scenario would essentially be in lieu of an equity raise, and would likely be similarly dilutive to existing GE shareholders."

Dray reiterated his sector perform rating on GE shares and his $16 price target for the stock, representing 19 percent upside to Tuesday's close.

Berkshire Hathaway did not respond to a phone call requesting comment on Tuesday's market speculation.

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