General Electric (GE, Financial) is a multinational conglomerate company once regarded as the most valuable business in the world. That was during the Jack Welch era and a few years after his retirement. The value of the company rose geometrically from $14 billion to over $410 billion, an increase of about 4,000%, within a period of 20 years. During this period, GE was much preferred by value investors because they were regularly rewarded with huge dividend payouts in addition to massive gain in stock price. Unfortunately, the tide turned on GE when GE Capital, its subsidiary that once improved its earnings greatly, was heavily hit by the economic recession of the 2008 to 2009 era. In the last few years, GE Capital remained the albatross that weighed down General Electric stock continually. However, going by the latest pronouncement by Jeffrey Immelt, the most criticized CEO of GE, investors do have much to look forward to as GE sets to exit retail lending and focus on industrial operations.
Really, as a conglomerate, GE is difficult to value appropriately. A large chunk of its yearly earnings comes from GE Capital which is its consumer and business financing segment. Retail finance alone accounts for about one-third of the earnings that GE Capital contributes to GE, but the company is now set to spin off its lending operations to improve its stock valuation and make it compare more favorably with its pure-play industrial peers like Honeywell International (HON, Financial), United Technologies (UTX, Financial) and Emerson Electric (EMR, Financial).
At the moment, United Technologies is ahead of other companies in the industrial sector with strong revenue growth, but its stock is about five times more expensive compared with GE. Also, in the last four years, the valuation of the GE stock has suffered significantly when compared with its pure-play peers in the industrial sector. For example, while GE has struggled to attain 17 multiples in P/E ratio, both Honeywell and Emerson have shot beyond a 20 times price earnings ratio. Also, between September 2012 and July 2013, GE stock trades at a discount of about 30% in comparison with Honeywell and at a whooping discount of 50% in comparison with Emerson when rated using the enterprise multiple method in each case. Therefore, it does make a lot of sense for GE to let go its lending operations and focus more on its industrial operations for more growth.
With $223 billion in its backlog business account, GE is a company with the ‘’biggest backlog of new business’’ in the history of the conglomerate as rightly averred by GE’s CEO. So investors are right to have wondered why GE stock lagged behind its peers in the industrial sector and even the broad stock market for so long despite its seemingly competitive advantages including it being the only company in the world with the best exposure to emerging markets.The $223 billion backlog business can adequately sustain GE’s operation for one year and six months.
GE’s Potential for Future Growth
According to GE’s 2012 annual report published earlier in the year, the company has already set in motion the catalyst for its potential future growth. The report states that most of the proceeds the company earned from Comcast (CMCSA) for the purchase of its stake in NBC Universal will be directed massively towards improving the value of its stock via share buybacks so that its share count can fall below 10 billion units.
In addition, GE has planned to return $18 billion to its share owners in the 2013 financial year by using a combination of dividends and share buybacks. Of this amount, the company claimed it has paid out a sum of $9.9 billion to date.
Another upside catalyst for GE stock is the announcement by GE’s CEO that the company planned to generate a whopping sum of over $100 billion that will be distributed among share owners over the next few years as dividends. If the last two dividend increases are anything to project on, GE will likely effect increases in dividends this current financial year that won’t be less than the $0.02 per share it paid out in each of the last two increases. That is most likely to happen because it will fall in line with its earnings per share (EPS) forecast for the year. Based its potentials for future growth, I consider GE as a good buy as at this time.
Really, as a conglomerate, GE is difficult to value appropriately. A large chunk of its yearly earnings comes from GE Capital which is its consumer and business financing segment. Retail finance alone accounts for about one-third of the earnings that GE Capital contributes to GE, but the company is now set to spin off its lending operations to improve its stock valuation and make it compare more favorably with its pure-play industrial peers like Honeywell International (HON, Financial), United Technologies (UTX, Financial) and Emerson Electric (EMR, Financial).
At the moment, United Technologies is ahead of other companies in the industrial sector with strong revenue growth, but its stock is about five times more expensive compared with GE. Also, in the last four years, the valuation of the GE stock has suffered significantly when compared with its pure-play peers in the industrial sector. For example, while GE has struggled to attain 17 multiples in P/E ratio, both Honeywell and Emerson have shot beyond a 20 times price earnings ratio. Also, between September 2012 and July 2013, GE stock trades at a discount of about 30% in comparison with Honeywell and at a whooping discount of 50% in comparison with Emerson when rated using the enterprise multiple method in each case. Therefore, it does make a lot of sense for GE to let go its lending operations and focus more on its industrial operations for more growth.
With $223 billion in its backlog business account, GE is a company with the ‘’biggest backlog of new business’’ in the history of the conglomerate as rightly averred by GE’s CEO. So investors are right to have wondered why GE stock lagged behind its peers in the industrial sector and even the broad stock market for so long despite its seemingly competitive advantages including it being the only company in the world with the best exposure to emerging markets.The $223 billion backlog business can adequately sustain GE’s operation for one year and six months.
GE’s Potential for Future Growth
According to GE’s 2012 annual report published earlier in the year, the company has already set in motion the catalyst for its potential future growth. The report states that most of the proceeds the company earned from Comcast (CMCSA) for the purchase of its stake in NBC Universal will be directed massively towards improving the value of its stock via share buybacks so that its share count can fall below 10 billion units.
In addition, GE has planned to return $18 billion to its share owners in the 2013 financial year by using a combination of dividends and share buybacks. Of this amount, the company claimed it has paid out a sum of $9.9 billion to date.
Another upside catalyst for GE stock is the announcement by GE’s CEO that the company planned to generate a whopping sum of over $100 billion that will be distributed among share owners over the next few years as dividends. If the last two dividend increases are anything to project on, GE will likely effect increases in dividends this current financial year that won’t be less than the $0.02 per share it paid out in each of the last two increases. That is most likely to happen because it will fall in line with its earnings per share (EPS) forecast for the year. Based its potentials for future growth, I consider GE as a good buy as at this time.
