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A French Company Being Taken Over by a U.S. Rival
Posted by: victorselva (IP Logged)
Date: April 25, 2014 10:09PM
The industrial conglomerates sub-industry includes major players that operate in several markets and draw a majority of revenue from overseas demand. The current trend is to focus on countries with higher growth potential.
In this article, let's take a look at a company that serves customers in more than 100 countries and try to explain to investors the reasons this is an apparently appealing investment opportunity.
The Biggest Acquisition
General Electric Co. (GE) operates as an infrastructure and financial services company worldwide. This company sells products ranging from aircraft engines and gas turbines to consumer appliances, railroad locomotives, medical equipment, business and consumer financing, media content and industrial products.
General Electric is one of the largest technology and financial services corporations in the world. It focuses on units that make jet engines, locomotives and industrial equipment and shrinking the finance division, called GE Capital. The firm expects to have a “double digit" growth in the coming years in countries like China. Few months ago, General Electric announced the joint venture with China XD Electric Co., which is one of the world’s biggest transmission equipment makers.
Furthermore, yesterday we found on the news that General Electric will buy Alstom SA (ALO), the French builder of power plants and transmission gear. The deal could consist on the separation of Alstom’s transport business, which manufactures high-speed TGV trains, to make easier the approval of the French government. A potential value for Alstom at about $13 billion would be about 25 percent more than its current market value. As a consequence, stock price surged as much as 18 percent in Paris, the biggest jump in the last nine years. General Electric will gain control of Alstom’s technology for power transmission and power plant maintenance.
Relative Valuation, Earnings and ROE
In terms of valuation, General Electric sells at a trailing P/E of 20.9x, trading at a slightly premium compared to the industry mean. Earnings per share (EPS) have increased by 19.5% in the most recent quarter compared to the same quarter a year ago. This year, Wall Street expects an improvement in earnings ($1.7 versus $1.47).
In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance showed an interesting upward trend in the last five years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has slightly decreased from the same quarter one year prior. This is a clear sign of weakness within the company.
Let´s compare the current ratio with the peer group in the next table:
General Electric has a current ratio of 10% which is lower than all the comps: 3M Company (MMM), Danaher Corp. (DHR), Carlisle Companies Incorporated (CSL), Koninklijke Philips N.V (PHG) and Raven Industries Inc. (RAVN).
As outlined in this article, under the General Electric-Alstom deal, strong synergies are going to surge as well as a good fit in the company´s growth strategies. These conclusions make me feel bullish on General Electric.
I would recommend investors to consider adding the stock for their long-term portfolios. Manning & Napier Advisors, Inc., which is the only manager that has beaten S&P500 for consecutive 10 years, has taken long positions on it on the first quarter of 2014.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Stocks Discussed: GE, MMM, DHR, CSL, PHG, RAVN,