We wrote about GE back in Nov 2016 and concluded:
Is there some hidden value in the portfolio? Some "investments"? A windfall from GE Capital? If there is, then I get the valuation. But if not, I'm left scratching my head. Okay, it's a quality stock, a great deal maker, constantly adjusting its portfolio. But it's hardly a bargain, in the way BRKB is when you take account of its investments.
So with the stock down down down... is it still a quality stock and is it now a bargain?
First the key stats
| Ticker | GE |
|---|---|
| Sector | Industrial Conglomerates |
| Latest price | $24.18 |
| Value | $209,349M |
| Daily vol | $1,062M |
| Date | 03 October 2017 |
| Financials | SEC Filings |
| Website | http://www.ge.com |
Next, what's changed in a year?
It's clearly not been a great year for GE, even if they've managed to restructure the Oil division merging it with Baker Hughes, and no nasty surprises from the old GE Capital. Sentiment and earnings have slipped.
| $GE | a year ago | today | change |
|---|---|---|---|
| Price | $29 | $24 | -17% |
| Target price | $33 | $29 | -12% |
| Sales forecast | $125bn | $125bn | -0% |
| EPS forecast | $1.72 | $1.56 | -9% |
| PE ratio | 17x | 15x | -6% |
Notably missing on the 2Q call in July was any reference to the old goal of $2 a share in earnings in 2018. Hmmm...
1. But back to basics, what is GE?
General Electric Company is a global digital industrial company. The Company's products and services range from aircraft engines, power generation, and oil and gas production equipment to medical imaging, financing and industrial products.
It's a big as$ conglomerate and have been a round for over 100 years. They are constantly refining their portfolio, merging divisions with competitors, selling off units, buying new companies. It's all about staying ahead of the pack!
2. Is it working?
Well, it's a huge machine with eight multibillion dollar revenue lines. When one business is outperforming it seems another isn't. The worst of the GE Capital fiasco is behind then. The worry over the oil unit has passed. Now it down to good old sales and innovation across all units.
| Metric | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|
| Revenue | $117bn | $117bn | $124bn | $125bn | $131bn |
| EPS | $0.94 | $0.17 | $1.00 | $1.56 | $1.68 |
But net net, the $2 a share target is no longer achieveable, as far as Wall Street is concerned.
3. Cash coming out of their ears?
As powerhouses go, GE is generating approximately $20bn of cashflow a year, and they like to pay it back to shareholders. For 2017 the aim is $11 to 13bn of share buyback and $8bn of dividends. i.e. this year the dividend alone should be $0.96 which is a nice 4% yield.
Though it seems that there is still a substantial amount of debt, with $90B on the books. That is 4.9x it's latest operating profit. A little high for my liking.
4. Prettier than?
Neither their margin nor their returns look amazing when compared to other large industrial firms. At least in the US. And it's only versus the Europeans that it looks a lot better. And a comparison against other ragbags like Buffett, J&J or IBM doesn't make them look any prettier.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| General Electric Company | $119,572M | 15% | 10% |
| Industrials | |||
| Honeywell International Inc. | $39,359M | 22% | 25% |
| United Technologies Corporation | $58,108M | 18% | 18% |
| Siemens AG (ADR) | $97,690M | 14% | 16% |
| ABB Ltd (ADR) | $33,556M | 14% | 17% |
| Koninklijke Philips NV (ADR) | $25,357M | 14% | 9% |
| Conglomerates | |||
| Berkshire Hathaway Inc. | $239,446M | 18% | 8% |
| Johnson & Johnson | $72,531M | 35% | 23% |
| International Business Machines Corp. | $78,440M | 21% | 67% |
| 3M Co | $30,533M | 28% | 46% |
But it's when we get to valuation that things start to perk up. The earnings multiple isn't aggressive, the dividend is reasonable, and although the long-term growth does look a little high, there is the comfort that management is focused on organic growth & margins. Better still they have done a good job of returning $20bn+ to shareholders the last couple years.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| GE | $209,349M | 15x | 11% | 4% | 10% |
| Industrials | |||||
| HON | $107,803M | 20x | 9% | 2% | 7% |
| UTX | $92,722M | 18x | 6% | 2% | 10% |
| SIEGY.PK | $119,395M | 15x | 6% | 3% | 11% |
| ABB | $53,516M | 20x | 10% | 3% | 9% |
| PHG | $38,729M | 23x | 13% | 2% | 9% |
| Conglomerates | |||||
| BRKA | $452,056M | 26x | N/A | 0% | 7% |
| JNJ | $348,947M | 18x | 6% | 3% | 8% |
| IBM | $135,206M | 11x | 2% | 4% | 15% |
| MMM | $125,261M | 23x | 9% | 2% | 8% |
5. Wall Street believes
So even though, expectations have been pulled in, Wall Street still says Buy with a target of $28.50 a share which is nearly 20% up from here.
6. Any catalysts?
The 2Q call in July wasn't inspiring, as the old CEO, Jeff Immelt prepared to hand over on 1st August to the new CEO, John Flannery. There was talk of restructuring in some divisions, a down market in 2017 for others, challenges, etc. So it's no wonder the stock's taken a beating.
Next comes the 3Q results in late October and then the grand event, the new CEO's strategy day on November 13th. Will he kitchen sink the outlook? He can't throw the old CEO under a bus, as he's still the Chairman until January, but he can give muted outlook.
7. Admiration not love
The adage is "buy the rumour, sell the news", so I'm tempted to dip in now. It's a solid business and the new CEO may streamline the business further. Maybe not. But even so, it feels like its now a quality business at a reasonable price.
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Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Submitted October 03, 2017 at 05:08AM by shane_stockflare http://ift.tt/2ylr3iO
