I am going to analyze the shares by assessing the historical trends, financial indicators, and analyst expectations. I am specifically going to use the two important valuation multiples - P/E and P/E to growth (PEG) - to compare the shares against each other and the industry.
The reason I’ve chosen GE is because it has excellent financials and its highly diversified portfolio enables it to effectively distribute its risk. This is extremely important considering how companies all around the world suffered because of the recent recession and the fact that the market is recovering well in 2012. GE has been able to protect their downside and is poised for growth with the tremendous recovery of the U.S. market.
GE is also playing a key part in the recovery of the U.S. economy. Recently, it started hiring military veterans in an attempt to reduce the unemployment pressure on the economy.
Taking a look at where the stock currently stands, GE is currently trading at around $19 per share. The stock has fluctuated a lot lately and according to its 52-week low-high range, it has been between $14 and $21. The 52-week range suggests that the stock is currently near the upper end of the range.
This means that despite the stock price suffering previously, it has recovered considerably. If we look at the price history, we will see that the stock hit the high point almost a year ago and then suffered a decline till it hit it low end in September 2011. The stock then managed to rise steadily and traded around $16 before it surged going into 2012. The year 2012 has been excellent for GE and the share price has currently stabilized at the currently level of $19.
The market capitalization of GE at this price is over $203 billion and the average trading volume is in excess of 46 million shares. It pays a quarterly dividend of $0.17 per share and this makes the annual dividend yield to be over 3.5%. Its earning per share (EPS) is around $1.25 and this means that the dividend payout ratio is 33%. This means that the company is paying out 55% of its earning as dividend, which is extremely impressive.
The P/E ratio is around 15.5, which is considerably decent. The P/E indicates the value of the stock and the lower it is, the higher is the value of the stock since it is the ratio of share price divided by the EPS of the stock. It enables to compare shares of different prices. The P/E ratio, however, does not take into account the growth of the EPS and hence the growth of the stock.
A more suitable measure for this will be the P/E to growth ratio, which is also known as PEG. PEG is used to indicate the value of the stock, with the growth of the stock accounted for. A lower PEG means that the stock is undervalued.
The five-year PEG of GE is 1.0, which is lower than that of the industry’s value of almost 1.1. This means that GE is going to grow more than the overall industry that is already a fairly profitable one.
The net profit margin of GE is approximately 10% and the debt-to-equity ratio is 3.90, which indicates that the company is financially sound. The beta of the stock is 1.86, which means that the stock is going to grow almost twice as much as the market. Therefore, the positive trend of the market in 2012 depicts a bright future for the company.
The target price of GE for the year is $21, which means that the stock has an upside potential of 11% for the current year. This makes it an excellent investment considering the solid financials and the excellent dividend yield – BUY.
Siemens AG (SI) is a German conglomerate that is operating in similar areas as GE. It is one of the biggest competitors of GE and the two companies differ majorly in the sense that GE is primarily catering to the U.S. market whereas Siemens has its stronghold in the European market.
This is the main factor that differentiates the two as both companies are operating in different markets. Europeans economy is under distress whereas the U.S. economy is recovering remarkably. This means that GE is currently in a better position in terms of the macroeconomic environment.
If we take a look at the where the shares of Siemens currently stand, we will see that SI is trading at around $99 per share. The stock has fluctuated a lot over the 52-week period and hovered between $84 and $146. Its market capitalization at the current price is over $92 billion and the average trading volume is in excess of 846 thousand shares.
The P/E ratio of SI is around 11.25, which is superb compared to to GE’s figure of 15.5. However, as discussed earlier, P/E factors out one important point – growth. Hence, if we take a look at the PEG ratio, we see that SI’s ratio is still better than that of GE. This means that SI is doing well in terms of valuation and is the more undervalued of the two stocks.
Both GE and SI have similar businesses and mostly operate in the same lines of businesses. Both the stocks are an excellent investment option and in order to evaluate which is better. We need to evaluate the two in detail.
SI generates more income than GE with respect to the assets and total equity. However, GE inches ahead by having better gross and net profit margins. The stronger margins mean that increased revenues will have a bigger impact on the bottom line.
We just discussed that SI is more undervalued than GE in terms of P/E and PEG ratio. But there is one crucial factor that separates the two businesses. The major portion of revenues of GE comes from the U.S. whereas Siemens predominantly operates in the European market. This means that GE is the superior company under the circumstances as the U.S. economy is recovering quite impressively whereas Europe is just on the brink of a recession.
Though Siemens may be the more undervalued stock, the macroeconomic factors are on the side of GE.
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