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Introduction

The General Electric Company (NYSE:GE) already has several characteristics that place it among the most successful companies worldwide. GE is the sixth biggest company in the United States, according to its gross revenue among the Fortune 500. It also claims fourteenth spot among the most profitable companies in the same cluster. Moreover, it never goes below twentieth in many ranking profiles, such as the Forbes Global 2000, Fortune, Interbrand, Newsweek, as well as Fast Company and many more. Just like any company, General Electric did not get into its present position with ease.

As a matter of fact, the company has a history of ups and downs. Looking into GE's history will allow investors to understand the decision-making, as well as thrust and future of this company. Hence, traders would have a better guide to decide whether or not to invest in this company. Also, understanding the story behind the graphs will provide some ideas on the future price of General Electric's stock and the overall valuation of the company's worth.

History and Current Events

The golden years of General Electric were probably from 1992 until early 2000, as the chart below shows.

(click to enlarge)

This is because in the early 1990s the company started to venture into various segments and opportunities, including the launch of its Web portal, as well as the CNBC and MSNBC. Since then, the company began to lead the industry through its worldwide online platform. In 1998, the company started to tap emerging markets, which led its stock price to soar up to $58.63 on 1 August 2000, which still remains its highest historical level. This followed enormous electronic sales amounting to more than $2 billion in 1999. It was also the era when GE had its GE Global Research Center in India.

GE launches more innovations and discoveries since 2001. However, the price of GE stock starts to plunge back to its 1998 level. This continues until early 2003 when the company's stock price started to stabilize and recover. Since then, the company has been in a relatively stable price level. However, the European financial crisis did not spare GE from its victims. GE's stock plunges drastically from $41.16 on 01 October 2007 close to as low as $8.51 on 01 February 2009. In just 14 months, the company's stock depletes by 79%, which is too drastic.

General Electric and the Competition

When assessing a company, the best approach is to look into its performance compared to the rest of the particular sector or industry. It is always beneficial to analyze how a company performs among the market competition. Aside from that, this will also allow traders to obtain valuable information about the closest alternatives to the stock. Hence, they can make a choice whether or not to pick GE for their investment. It is with this in mind that the following table was drawn up in order to provide fast facts about GE, as well as its main competitors - United Technologies (NYSE:UTX) and 3M (NYSE:MMM) - against the industrial average.

 

General Electric

United Technologies

3M

Industry Average

Price/Earnings

15.5

13.3

14.3

15.9

Price/Book

1.8

2.8

3.5

2.4

Dividend Yield, %

3.3

2.8

2.6

2.4

Debt/Equity

1.9

0.9

0.3

0.8

Return on Equity

10.8

18.5

25.5

15.0

Market CAP

$219 bil

$71 bil

$62 bil

x

Current Price

20.88

76.93

89.19

x

Estimated fair value range

$24-$36

$91-$118

$91-$117

x

Stock valuation

Undervalued

Undervalued

Undervalued

x

Upside Potential to reach a fair stock value

16%

18%

2%

x

Taking a short-term look at GE, together with its major competitors, it seems that GE is far behind UTX and MMM, in terms of profitability. Hence, traders can say that the competitors are better alternatives than taking GE. By contrast, GE's dividend yield of 3.3% looks more attractive than UTX's and 3M's. However, these judgments would be incomplete without considering the other key financial indicators at hand.

In terms of market capitalization, GE would be superior against its two main competitors. Adding up the current level of both UTX and MMM will not even equate to the $220 billion level of GE. This only means that the company is, indeed, the leader in this industry. However, this could be misleading. This is because GE is a very diverse company, while UTX is primarily concerned with the development of technologies, and MMM is developing and manufacturing products that are unique. In other words, the three companies might not be playing on the same field. Maybe the reason why GE has such high capitalization and prestige is that it has other fields it can work on when some of its segments falter. After all, this is the benefit of investment diversification.

On the other hand, with the P/E ratios of the three companies close to the industry average, these stocks are, nonetheless, profitable to buy. What this means is that taking any of the three would already be profitable enough for investors. The only thing that distinguishes them is the magnitude, scale and intensity of the possible earnings.

Another key indicator that traders should never miss when assessing a stock's performance is the P/B ration. This is because this indicator tells investors whether or not the company is experiencing a high return on its assets. In the case of GE, since its ratio is greater than 1, this figure is still good. Combining this indicator with ROE would be an excellent tool for the reality of the company, and, of course, this P/B ration should be growing together with its ROE. Aside from that, the dividend yield is also good news for the shareholders of this stock, since it is higher than the industry average and the rest of its major competitors.

In contrast, looking into the debt/equity ratio of General Electric, it is quite high compared to the industrial average and the rest of its competitors. If people look into this indicator alone, this might cause alarm. This is because a 1.9 ratio means that the company is quite aggressive when it comes to financing its business growth through the use of debt. Consequently, this will result in a relatively volatile level of earnings.

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests the following: currently stocks of GE, UTX and MMM are undervalued. However, EFS's fair stock price valuation indicates that both GE's and UTX's stocks are trading at attractive discounts.

Bottom Line

Taking into consideration the historical movement of the company's stock price is valuable in that it gives a holistic assessment of how will it most likely behave in the future. Adding this to the current performance of its stock would positively complement the evaluation process. Now, based on the discussion above, it is safe to suggest keeping hold of or buying this stock in the next three years. This is because looking at the way it has behaved over the years, GE has been relatively stable since 2009. It is expected to be this way in the coming years, because another major drop is quite unlikely as the graph and financial indicators above show.

Source: General Electric: What Does The Future Hold?