The Dow dogs made huge gains last year and, in my opinion, they will repeat that performance in 2012. In this article, I analyze my favorite Dog of the Dow, General Electric, going into 2012. This stock underperformed its peers last year, but, due to its valuation, could see 20% upside from its current price. Please use my research as a starting point for your own due diligence.
General Electric (GE, Financial) is a conglomerate that has been hurting since its GE Capital division was ensnared in the 2008 financial crisis. The company is still dealing with investor lawsuits claiming it misled them to the tune of $150 billion. Although General Electric lost its coveted AAA rating and its Capital arm remains in remission, I see this as a positive. The company has been able to refocus on its technical capabilities in infrastructure, energy and industrial products. Given its strong sales team, I think that investors will be surprised by the company’s earnings power.
Total orders for the fourth quarter in 2011 were up from its energy and plastics divisions and included 9% organic growth in sales. The backlog of orders for the fourth quarter totaled $2 billion and the financial arm, GE Capital, increased earnings 58% for the quarter. The Capital division cannot sustain that level of growth in my opinion because it was mostly due to the company moving loan loss provisions from earmarked reserves to cash.
In the fourth-quarter, General Electric reported earnings of $0.39 per share, an 11% gain over the same quarter in the previous year. Full-year earnings are up 22%. Expectations for the current quarter are $0.44 cents per share, though I anticipate that the company can surprise to the upside because the company’s oil and gas division saw an additional order of $1 billion for the Ichthys LNG project in Western Australia.
The current share price implies a yield of 3.5%. While analysts see a dividend increase in December 2012, I think the company is poised for a potential dividend increase by late summer because of strong cash flows that are coming in at $36 billion per year on an operating basis.
Shares trade around $19 apiece. On a discounted cash flow basis using a 10% cost of equity, I value shares at $25 apiece. Investors could see 20-25% upside from here.
For options investors, I suggest longer dated calls in January 2013.
The January 2013s at strike price $20 and $22.50 are selling for $1.24 and $0.50, respectively, and have plenty of liquidity. In terms of risk-reward ratio, breakeven is at $21.24 and $23, respectively. If my target price pans out, callholders could be rewarded handsomely.
General Electric (GE, Financial) is a conglomerate that has been hurting since its GE Capital division was ensnared in the 2008 financial crisis. The company is still dealing with investor lawsuits claiming it misled them to the tune of $150 billion. Although General Electric lost its coveted AAA rating and its Capital arm remains in remission, I see this as a positive. The company has been able to refocus on its technical capabilities in infrastructure, energy and industrial products. Given its strong sales team, I think that investors will be surprised by the company’s earnings power.
Total orders for the fourth quarter in 2011 were up from its energy and plastics divisions and included 9% organic growth in sales. The backlog of orders for the fourth quarter totaled $2 billion and the financial arm, GE Capital, increased earnings 58% for the quarter. The Capital division cannot sustain that level of growth in my opinion because it was mostly due to the company moving loan loss provisions from earmarked reserves to cash.
In the fourth-quarter, General Electric reported earnings of $0.39 per share, an 11% gain over the same quarter in the previous year. Full-year earnings are up 22%. Expectations for the current quarter are $0.44 cents per share, though I anticipate that the company can surprise to the upside because the company’s oil and gas division saw an additional order of $1 billion for the Ichthys LNG project in Western Australia.
The current share price implies a yield of 3.5%. While analysts see a dividend increase in December 2012, I think the company is poised for a potential dividend increase by late summer because of strong cash flows that are coming in at $36 billion per year on an operating basis.
Shares trade around $19 apiece. On a discounted cash flow basis using a 10% cost of equity, I value shares at $25 apiece. Investors could see 20-25% upside from here.
For options investors, I suggest longer dated calls in January 2013.
The January 2013s at strike price $20 and $22.50 are selling for $1.24 and $0.50, respectively, and have plenty of liquidity. In terms of risk-reward ratio, breakeven is at $21.24 and $23, respectively. If my target price pans out, callholders could be rewarded handsomely.
