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Looking for General Value

July 29, 2014 | About:

General Electric (GE) is on of the largest infrastructure and financial services companies in the world. GE produces aircraft engines, oil and gas production equipment, household appliances, power generation equipment and delivers services such as consumer and business financing. This was a very short list of the products and services that GE offers, since General Electric is much more diversified in the types of businesses it operates. A large and diversified company, such as GE, has many different streams of income coming in from its various businesses. As a value investor, we need to figure out whether those income streams will add value to us and our portfolio.

With a dividend yield of 3.3% and a 5 year dividend growth rate of 9.8%. This is a great sign for GE, since it had been consistently increasing its dividend for over 25 years before it was cut by 66% during the recession of 2009. Increasing dividends are a great sign that the company is confident in its future growth and that investors will be able to count on a consistent and growing income stream for themselves.

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Looking through GE’s cash flow statement, we see that cash flow from operations has declined from $33.3 billion in 2011, to $31.3 billion in 2012 to finally $28.5 billion in 2013. This translates to a 6% and 9% decline in operating cash flows. Overall, cash did increase in 2013 by $11.3 billion from 2012, but this was largely due to the sale of equity interest in NBCU LLC. The decline in cash flow from operations is a little startling, but shouldn’t cause panic for those that already have a position in GE.

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Using Guru Focus’ interactive charts, we can see a couple of things. We notice that GE is currently trading at 1.9 times its book value. This isn’t a terrible ratio because we could be willing to pay a premium to book value for a very solid business. GE is also trading at 17 times its free cash flow. For me, I find value by investing in businesses at are trading below 15 times their free cash flow. I personally feel that it is a safe way to invest in a company that is investing in its future, generating cash for its current and future business operations, and has the ability to continue paying dividends. GE’s free cash flow per share is currently at $1.47. We then take its free cash flow per share and init this into Guru’s DCF model.

We then see that GE has a fair value of $21.68, and a margin of safety of -18%. A negative margin of safety, priced at almost 2 times its book value and trading at 17 times its free cash flow together tell me that GE is a bit overpriced. Although it does pay a decent dividend that continues to grow, I think it would be best for a value investor to wait until GE’s price dips. Until then, we can search for value somewhere else.

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