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GE Stock Analysis

December 13, 2011 | About:
Mara Kohn

Mara Kohn

4 followers
General Electric (GE) is a leader in technology and financial services in the world. It provides products that range from aircraft engines, power generation, water processing and security technology to medical imaging, business and consumer financing, media content and industrial products.

All its products and services are spread in more than 100 countries and GE is considered a leader in all the markets in which it competes.

GE is not a sheer conglomerate of businesses because it combines the latter with strong synergies and opportunities for sharing information across the business lines.

GE has a wonderful ability to invest and expand businesses. The firm is able to generate healthy returns on invested capital in many of its markets. It is also customer-focused. GE makes every effort to remain relevant to customers and to develop projects customers will be willing to pay for.

Interestingly, it has changed its focus with the shift of the world towards clean-energy products. The company has followed this shift in wind and gas turbines. The former provides GE remarkable competitive advantage.

The company is organized in five business segments:

GE Capital: this segment offers a variety of products, from consumer lending to financial solutions. This segment includes General Electric’s Commercial Lending and Leasing, which provides customer specific financing solutions; Consumer Financing, which provides innovative financing and banking solutions; Real Estate, which provides real estate lending, equity capital, asset and investment management; Energy Financial Services, which makes investments in essential, long-lived and capital intensive assets; GE Capital Aviation Services businesses, which provide wide range of leasing, financing and servicing products on commercial aircrafts, engines and parts and General Electric Capital Corporation Corporate.

Technology Infrastructure: this segment includes Aviation, Healthcare and Transportation businesses. GE Aviation is a leading supplier of commercial and military jet engines and components; GE Healthcare has expertise in medical imaging and information technologies, medical diagnostics, patient monitoring systems, disease research, drug discovery and biopharmaceutical manufacturing technologies, and GE Transportation provides technology solutions for customers in a variety of industries, such as railroad, marine, drilling, wind and mining.

Energy Infrastructure: The segment produces gas, steam and aero derivative turbines; generators; combined cycle systems; and renewable energy solutions, as well as provides water treatment services and equipment. Energy Infrastructure includes Energy business (including the Sensing & Inspection Technology and Digital Energy businesses) and Oil & Gas business.

GE Energy is the major provider of power generation and energy delivery technologies in all areas of the energy industry including coal, oil natural gas and nuclear energy as well as with renewable resources such as water, wind, solar and alternative fuels.

GE Oil & Gas provides highly developed technology equipment and services to onshore, offshore and subsea oil & gas projects.

NBC Universal is a diversified media and entertainment company focused on the development, production and marketing of entertainment, news and information to a global audience. NBC operates throughout North America, Europe, South America and Asia.

NBC Universal is engaged in the production and distribution of film and television programming.

Home & Business Solutions: this segment specializes in Appliances and Lighting, and Intelligent Platforms businesses. It sells and services major home appliances including refrigerators, freezers, electric and gas ranges, cook tops, dishwashers, clothes washers and dryers, microwave ovens, room air conditioners, and residential water systems for filtration, softening and heating. Its brands are GE Monogram®, GE Profile and GE Café.

What would make an investor think about GE as a pick? Here are the advantages it provides:

  • The energy business envisions long-term growth. The company thinks that the demand for energy production and fossil fuels will increase in the years to come due to the concerns about global warming. Growth has been very strong, with 15% in the last quarter and 56% in energy equipment demand.

  • Aviation is a long-cycle business. The rebound in commercial air traffic has boosted the segment’s results. Moreover, GE has been manufacturing new jet engines fostering higher demand among aircraft manufacturers. In the latest reported quarter, total orders for the aviation segment were up 14%, with Commercial engines up 14% and military engines up 15%.

  • General Electric’s international presence is strong and fruitful. More than 50% of GE s total revenue is generated from emerging markets.

  • General Electric has a strong free cash flow. During the latest reported quarter, the company generated over $91 billion in free cash flow. It allows management the opportunity to invest in product innovations, acquisitions and business development.


There are also certain headwinds that GE may suffer. Although the advantages clearly outnumber the risks and it is known that GE has a solid base to face them, it is necessary to mention them.

GE businesses are susceptible to economic downturns and the company is exposed to the creditworthiness of its counterparties and may suffer steeper write-downs as delinquencies rise.

Least but not last, although GE has access to lower-cost financing, it may lose it at any time hurting profitability and growth perspectives.

In terms of quarter results, the last reported ones have been strong. GE has achieved earnings of $0.31 per share after an 11% growth. In addition, internal orders rose to 6% thus supporting a $191 billion backlog.

The weaknesses in prices are putting pressure on energy margins. However management is sure that energy will start to see earnings growth. As regards GE Capital, it has reported another solid quarter with growing earnings and lower losses. Moreover, management is planning to send GE Capital dividend back to the parent company. This will strengthen its cash position.

GE has also repurchased $1 billion of stock this last quarter and management has recommitted to increase dividend payout in the coming months.

In terms of management, the team is considered strong and has wide experience in the market. It has a long history of creating value to shareholders.

The last ten years have witnessed a stronger balance sheet, significant acquisition spending and the divestiture of most of the firm’s insurance and plastics businesses.

“GE’s corporate-governance practices are very interesting. The management team’s focus on shareholders and expanding opportunities make GE an excellent opportunity”, said Arne Alsin, from Capital Management.

In terms of valuation, current trailing 12-month earnings multiple is 11.2x, compared with the 14.9x average for the peer group and 15.8x for the S&P 500.

Shares have been trading between 4.7x and 19.6x.

GE’s earnings are expected to grow 12.6% over the next five years.

Rating: 3.3/5 (16 votes)

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