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I Don't Know What to Think About General Electric
Posted by: Fast Weekly (IP Logged)
Date: February 11, 2014 10:22AM

Every now and then I analyze a company that sends so many mixed messages and has so many distracting signals, I don't know how to feel about it. General Electric is the first company of this sort I've had in several years. I have held my General Electric (GE) shares for years and they pay me about $500 per year, but it's time I take another stab at this beast and see if I will buy, sell or hold.

General Electric (GE) is the quintessential conglomerate. Headquartered in Connecticut, this multinational behemoth owns and runs businesses the world over. Most people know GE best as the maker of small appliances for their home or engines on planes. GE, however, produces so much more. Its health care division builds and markets MRI and CAT Scan machines. Its generators and turbines produce power. Its oil and gas division sells equipment to aid in the drilling and pumping of hydrocarbons. GE even has a financial division that provides loans and short-term commercial paper. It was the financial division (GE Capital) that caused the parent company so much heartache during the financial crisis.

So let's dive into the numbers and take a look at GE today. I always like to take a look at the return on equity numbers for any company I'm analyzing. In this case they are:

For a look at the revenue per share, see the chart below

Those revenue per share figures and ROE figures look pretty rocky. Let's dig a little deeper. The price to earnings ratio is over 18, which is pretty expensive for a company of this size. GE pays a divided of about 3.5%, but the payout has is still below where it was 10 years ago. On the positive side, GE has been raising its dividend lately, and the future ability to grow that dividend appears to be somewhat likely with a dividend payout ratio of 57% this year. The free cash flow (FCF) and earnings per share (EPS) have been erratic since at least 2008. It's safe to say that GE went into the financial crisis with a large and unwieldy business model. It is realigning its businesses, but it's tough to predict future growth for GE. The past 10 years' financial numbers are shown below, but it's difficult to say how helpful they will be in predicting future growth. Please note that this data is for the 2003 to 2012 time period.

The FCF and EPS figures above are a mess. GE has FCF and EPS BELOW where they were 10 years ago. It has, however, made significant strides in the past four years. In the table above you can see that I am assuming no earnings growth in my growth projections, which may be overly conservative. I like to discount my future earnings at 5%, which is historically the interest rate of “safer” investments. Five percent has also generally exceeded the rate of inflation, which is why I'm comfortable with it.

Using the valuation model in the table, GE appears to be a mess, and a difficult company to justify investing in. In fact, its stock price is currently trading around $25. I like to invest in companies at a significant discount to what I feel the companies are worth. After this valuation exercise, I have no idea what GE is worth, nor do I know what its future business will look like. It has been making huge investments in its oil and gas business recently, but given the expansion of oil and gas production it seems reasonable that profit margins in the oil/gas space will fall in the future.

To be fair, GE's debt figures are massively skewed by GE Capital. The parent company is slowly selling off and downsizing its GE Capital division, after learning its lesson in the financial crisis. I can be quite a bit more optimistic about General Electric once its GE Capital division is sold off. The industrial divisions of the company have been making some great strides in the last couple years. Still, I feel there are better places to invest my money!

I must point out that Jeffrey Immelt (CEO) and James Rohr (director) purchased over $1.2 million dollars of the stock in late January. Immelt's purchase was a little over $1 million by itself and executed today. I'm sure they know many things I don't, but...

What are your current thoughts about GE? Is it a premiere industrial growth machine, poised for for rampant global growth, or just an indebted behemoth poised to get crushed by the next recession?

Disclosure: I currently own GE shares that I bought during the financial crisis, but am not considering further investments at this time. This valuation is for informational purposes only and does not constitute a recommendation to buy, sell or hold any securities. I am not a financial professional. Data used in this article was gathered from Yahoo Finance and GuruFocus.com



Stocks Discussed: GE,
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Re I Don t Know What to Think About General Electric
Posted by: Michael S. (IP Logged)
Date: February 11, 2014 01:27PM

I don’t think this article is as useful as it could be. In many places, the author compares current data to a 10 years ago period….and he ignores the favorable trends of the last 5 years.

For example, “the dividend payout is still below where it was 10 years ago.” So what? It has been increased 6 times in the last 5 years and at the current yield of 3.6% I believe the stock is a “Buy” at the current price of 25.2

I think some data needs clarification. There are many “earnings” figures for a company like GE but I believe that operating earnings are a more consistent metric to be used. This is an after-tax number but takes away the confusion of any one-time adjustments, any discontinued operations, pension costs, etc.

For CY2013 GE earned (operating net after-tax) $1.64 per share which was a +9% increase over CY2012 ($1.51) . The dividends paid in CY2013 were $0.76 which gives a dividend payout ratio of 46% (as listed in Value Line).....not the 57% in the article.

Secondly, for the author to “assume no earnings growth in my projections” is completely unfounded. I would suggest, in future articles and analysis, that the author do some research using Wall Street Journal Cheat Sheet and Value Line. He will see that both of these highly respected stock analysis services show a future 5-year earnings growth between +9.0% and +11.0% per year.

It is unfortunate that the author says “I have no idea what GE is worth”. For myself, a valuable metric is the PEG ratio. For GE, the forward P/E is 25.3 / $1.71 = 14.8. Using the average earnings growth of +10.0% per year, this gives a PEG = 14.8 / 10.0 = 1.48 While this is not as low as I would like, it is in my “Buy” zone.

The book value (as of 12/31/13) is $131.5B / 10.1B = $13.02 per share. The article is silent on this important metric. At a Price/Book (P/B) of less than 2.0, again I consider GE a “Buy”

The author’s statement “I can be a bit more optimistic about GE once its GE Capital division is sold off” is confusing. The GE Capital division (known as GECC) is not being completely sold but rather is being reduced by -20%. For the author to wait until 2015 when this reduction is fully completed, he will miss out on the potential stock price gains. The consensus 1-year target is 29.5 and GE will likely hit $30 or higher in 2015.

For full disclosure, I am long GE and believe it is a current “Buy” and an excellent long-term investment.



Stocks Discussed: GE,
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Re I Don t Know What to Think About General Electric
Posted by: Fast Weekly (IP Logged)
Date: February 11, 2014 03:18PM

Thank you for taking the time to comment Michael S.  I can see you're quite a fan of GE!  Obviously, I am less so.  Individual data points suggest various valuations for GE.  ROE, Gross Margins, and Free Cash Flow have all been falling for the last few years.  That's not a good sign.  Some data points have shown improvment over the past 5 years, it's true.  I question what the company will look like in 5 years thought.  I don't invest my money in something because of hope for a brighter tomorrow.  Maybe GE will become the amazing industrial company it can (and should) be, but I'm not here to speculate on that.  Ultimately GE destroyed it's long term track record during the financial crisis and is now a rather marginal bloated conglomerate.  As I said in my article, there are better places to put my money.



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