General Electric (GE, Financial) is one of the largest companies in the world, with a market cap of more than $247 billion. However, despite its scale and the advantages related to it, the company’s performance has not been very good over the past decade, having underperformed the S&P 500 index by more than 80% in average.
But, as the company recuperates along with the U.S. economy, does an opportunity for a long-term investment arise? Or should you rather consider Siemens AG ADR (SI, Financial), second in scale amongst diversified industrials manufacturers?
Changing Focus to Recover
In order to reverse the poor performance that GE had been having over the past decade, the management has been divesting underperforming businesses, like its stake in Comcast (CMCSA). Instead, its focus is being increasingly put on industrialization and expanding economies. A particular segment of interest is that of the energy infrastructure, more specifically, clean-energy products like wind and gas turbines, which are expected to drive growth going forward.
In addition to its industrial arm, GE also has a financial arm, which had been suffering since 2008. However, it has managed to recover and improve capitalization, portraying a better outlook for the long-term (and although the shorter-term might still be slightly troubled, GE Capital is still a cash cow for the parent company).
GE generates most of its revenue at emerging markets. This provides plenty of expansion opportunities for the years to come. Infrastructure developments at India and China should be particularly relevant as growth drivers.
Valuation and What's Coming
Although the stock has been in a steady rise since 2011, GE´s valuation at 16.9 times its earnings still looks quite attractive, especially if compared to the 18.8x industry mean. Even better, a 3.14% dividend yield and a 44.3% operating margin, position the company among the industry leaders in these categories.
Carrying substantial upside potential, this looks like a stock to buy and hold; a sustainable and simple business model, scale advantages and a history rewarding shareholders back up this position. However, remember, this is not only an industrial stock, as GE Capital single-handedly contributes with more than 30% of the total revenues, about double that of any of its other segments.
GE will announce its third quarter results Friday, Oct. 18, and is expected to deliver higher profits on margin expansion driven by cost cuts and “a moderate top-line growth driven by strong performances at aviation and oil and gas segments supported by an anticipated recovery in wind and gas turbine delivery volumes” (SeekingAlpha).
Siemens Looks Like a Better Option
Siemens is also a diversified industrials manufacturer, mainly focused on the Industrial, Energy and Healthcare sectors. Compared to GE, two main differences stand out: (1) Siemens is about half of GE´s size, with a market cap of $103 billion, and (2) although the company has a financial arm, it is not very relevant to its earnings. Also, Siemens´ operating margin at 7.4% is substantially narrower than GE’s.
On the bright side, Siemens’ returns are considerably better than GE’s (and slightly above industry averages):
Source: Morningstar
Siemens’ valuation at 15.8 times its earnings is also more attractive than GE’s, too. Same can be said about its growth prospects: analysts expect the German firm to deliver average annual EPS growth rates above 60%, while projections for GE are under 10% per year.
These growth projections are mainly based on three growth catalysts: (1) a strong demand for infrastructure in both developing and developed countries over the next several years; (2) its position as “the number-one provider of offshore wind turbines and the only major company to offer deep-sea wind turbine solutions” (Morningstar); and (3) several cost cutting initiatives, including a recent round of lay-offs, which should improve operating margins. Also, the “Siemens 2014” program oriented to create sustainable value is expected to impact positively on results over the long term.
Germans Are Hard Workers, That’s For Sure
GE’s strong international presence exposes it to political and economic instabilities, as well as currency fluctuations. Furthermore, GE Capital’s significant exposure to the commercial real estate market is expected to negatively impact on the company’s earnings, at least until real estate values increase and the credit market regularizes.
Meanwhile, Siemens faces better prospects and lesser risks. Offering a more attractive valuation than GE, while boasting a decent dividend yield (2.42% of the current stock price), this looks like the stock to buy and hold.
Disclosure: Damian Illia holds no position in any stocks mentioned.
But, as the company recuperates along with the U.S. economy, does an opportunity for a long-term investment arise? Or should you rather consider Siemens AG ADR (SI, Financial), second in scale amongst diversified industrials manufacturers?
Changing Focus to Recover
In order to reverse the poor performance that GE had been having over the past decade, the management has been divesting underperforming businesses, like its stake in Comcast (CMCSA). Instead, its focus is being increasingly put on industrialization and expanding economies. A particular segment of interest is that of the energy infrastructure, more specifically, clean-energy products like wind and gas turbines, which are expected to drive growth going forward.
In addition to its industrial arm, GE also has a financial arm, which had been suffering since 2008. However, it has managed to recover and improve capitalization, portraying a better outlook for the long-term (and although the shorter-term might still be slightly troubled, GE Capital is still a cash cow for the parent company).
GE generates most of its revenue at emerging markets. This provides plenty of expansion opportunities for the years to come. Infrastructure developments at India and China should be particularly relevant as growth drivers.
Valuation and What's Coming
Although the stock has been in a steady rise since 2011, GE´s valuation at 16.9 times its earnings still looks quite attractive, especially if compared to the 18.8x industry mean. Even better, a 3.14% dividend yield and a 44.3% operating margin, position the company among the industry leaders in these categories.
Carrying substantial upside potential, this looks like a stock to buy and hold; a sustainable and simple business model, scale advantages and a history rewarding shareholders back up this position. However, remember, this is not only an industrial stock, as GE Capital single-handedly contributes with more than 30% of the total revenues, about double that of any of its other segments.
GE will announce its third quarter results Friday, Oct. 18, and is expected to deliver higher profits on margin expansion driven by cost cuts and “a moderate top-line growth driven by strong performances at aviation and oil and gas segments supported by an anticipated recovery in wind and gas turbine delivery volumes” (SeekingAlpha).
Siemens Looks Like a Better Option
Siemens is also a diversified industrials manufacturer, mainly focused on the Industrial, Energy and Healthcare sectors. Compared to GE, two main differences stand out: (1) Siemens is about half of GE´s size, with a market cap of $103 billion, and (2) although the company has a financial arm, it is not very relevant to its earnings. Also, Siemens´ operating margin at 7.4% is substantially narrower than GE’s.
On the bright side, Siemens’ returns are considerably better than GE’s (and slightly above industry averages):
| Siemens | Ind. Avg. | GE | |
| ROA TTM | 4.4 | 4.0 | 2.1 |
| ROE TTM | 16.0 | 15.2 | 11.7 |
Siemens’ valuation at 15.8 times its earnings is also more attractive than GE’s, too. Same can be said about its growth prospects: analysts expect the German firm to deliver average annual EPS growth rates above 60%, while projections for GE are under 10% per year.
These growth projections are mainly based on three growth catalysts: (1) a strong demand for infrastructure in both developing and developed countries over the next several years; (2) its position as “the number-one provider of offshore wind turbines and the only major company to offer deep-sea wind turbine solutions” (Morningstar); and (3) several cost cutting initiatives, including a recent round of lay-offs, which should improve operating margins. Also, the “Siemens 2014” program oriented to create sustainable value is expected to impact positively on results over the long term.
Germans Are Hard Workers, That’s For Sure
GE’s strong international presence exposes it to political and economic instabilities, as well as currency fluctuations. Furthermore, GE Capital’s significant exposure to the commercial real estate market is expected to negatively impact on the company’s earnings, at least until real estate values increase and the credit market regularizes.
Meanwhile, Siemens faces better prospects and lesser risks. Offering a more attractive valuation than GE, while boasting a decent dividend yield (2.42% of the current stock price), this looks like the stock to buy and hold.
Disclosure: Damian Illia holds no position in any stocks mentioned.
