General Electric Company (NYSE:GE) is a diversified technology and financial services company and a leader in all markets in which it competes. GE is organized into four segments: technology infrastructure, energy infrastructure, home and business services, and capital services. By shedding its underperforming businesses and reducing its risks in GE Capital, GE is now focusing on the energy and power infrastructure market, which should support continued growth for GE.
On Dec. 26, 2012, as reported, GE's global research has put together a team of researchers who have achieved a milestone in the price reduction of zero emission buses by using new Durathon battery of GE combined with a lithium battery and hydrogen fuel cell. The development will create a new way to manage the energy which buses consume and it could enrich their fuel acceptance and electrification, along with that of delivery trucks as well as other heavy-duty vehicles, making possible use of cleaner vehicle technology.
On Dec. 21, 2012, GE agreed to buy Avio, an Italian aerospace company, for $4.3 billion. Avio is a long-time partner for GE in its jet engine business. As reported, GE and Avio have deep ties. Avio has been supplying components to the American conglomerate since 1984, and more than half of last year's revenues in the aviation sector came from selling engine components to GE As said by David Joyce, president and chief executive of GE Aviation, "This acquisition is a great strategic fit with our existing portfolio. Avio has technologies, capabilities and outstanding engineers to help grow our business." The purchase price for Avio, $4.3B, is about 8.5 times Avio's estimated 2012 earnings before interest, taxes, depreciation and amortization.
On Dec. 20, 2012, GE and La-Z-Boy Inc. (NYSE:LZB) announced a five-year extension of their relationship to provide consumer credit card services through many of the home furnishings retailer's 781 U.S. retail locations. GE Capital Retail Bank provides financial solutions to retailers to help grow their customer sales and will continue to service the account and manage the La-Z-Boy relationship, which began in 2007.
On Dec. 14, 2012, GE boosted its share-repurchase program by $10 billion and boosted its dividend by 12$ as GE continued to increase its shareholder value. The buyback program, which had about $4.9 billion in remaining authorization at the end of its third quarter, was extended through 2015. The company has raised its dividend five times in three years after drastically cutting the payout in 2009 to 10 cents from 31 cents amid the recession.
Analyst's Call and Earnings Estimates
On Dec. 26, 2012, GE has been reiterated by TheStreet Ratings as a buy with a rating score of B. As reported, "The company's strengths can be seen in multiple areas, such as its growth in earnings per share, revenue growth, solid stock price performance, expanding profit margins and reasonable valuation levels. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
On Dec. 20, 2012, Oppenheimer & Co. reiterated its "Outperform" rating on GE as well as its $24 price target. As Oppenheimer's analyst stated, "Margins, services execution, and global growth were highlighted as the core execution levers for GE for 2013 and beyond. Complexity was cited as fertile ground for margin improvement, given that evolution of GE's industrial portfolio over the past decade witnessed mix shift from about two-thirds US to about one-third US and roughly half of revenues now drawing from business GE was not in ten years ago. Services (>80% industrial OP) targets 5%+ revenue growth annually (~5% in 2013) driven by installed base, IB, growth compounded by services value/IB. GE noted 4Q12 slowing across Healthcare and HBS, and some energy pushouts, but expects orders up slightly (exwind) and for backlog to grow ~$2B during 4Q."
Analysts are expecting an EPS of $0.43 and revenue of $38.81B for the current quarter, ending in December, 2012. For 2012 full year, analysts are expecting an EPS of $1.51 with revenue of $147.14B. Analysts are also projecting EPS of $1.68 and revenue of $150.20B for 2013, which will increase by 2.10% compared to 2012, as seen from the table below.
Source: Yahoo! Finance
Key Stats and Valuation
GE has an enterprise value of $564.34B and a market cap of $217.80B. GE currently has total cash of $85.46B, mrq, and generates an operating cash flow $29.21B, ttm, with a levered free cash flow of $29.62B, ttm. GE has a book value of $11.69 per share.
By using the data obtained from Morningstar, GE will be compared to its peers in the industry of diversified industrials, including Siemens AG (SI) and United Technologies Corp (NYSE:UTX). GE has negative revenue growth and EPS growth (3 year average) of -6.9 and -11.6, which are lower than the industry averages of -0.1 and 11.1. GE generates lower operating margin of 11.3%, ttm, and higher net margin of 9.2%, ttm, comparing to the industry averages of 15.4% and 8.6%, ttm. GE also has lower ROE of 10.8 and higher debt-to-equity of 1.9, compared to the averages of 14.9 and 0.8. GE's key stats were not as attractive as its competitors due to GE's objective to shrinking higher margin operation from GE Capital, which also contributed to higher debt ratio.
GE has a P/E of 15.6, P/B of 1.8, and P/S of 1.5, which are all lower than the industry averages of 17.1, 2.5, and 1.4. GE has a forward P/E of 11.6, which is below S&P 500's average of 14.2. The PEG for GE is 1.2.
GE closed at $20.77 with 0.24% loss on Wednesday. The volume of 28.56M was 66.22% of 30 day average volume of 43.13M. GE had been trading in the range of $17.72-$23.18 in the past 52 weeks. GE has a beta of 1.60. The MACD (12, 26, 9) indicator started to show a bearish sign on Dec. 21 and the MACD difference continued to diverge. The momentum indicator, RSI (14), is showing a bearish lean at 43.99. GE is currently trading below its 50-day MA of $21.10 and above its 200-day MA of $20.24, as seen from the chart below.
There are many improvements for GE throughout 2012 and 2013 should be an even better year with continued growth. For long-term investors, a credit put spread is reviewed, which will allow investors to acquire GE stock at a lower price while gaining some upside potential.
- Short 1x March 16, 2013 put at the strike price of $20.00 for the credit of $0.61
- Buy 1x March 16, 2013 put at the strike price of $18.00 for the cost of $0.21
The maximum profit is $0.40, and the maximum risk/margin requirement is $1.60 ($2 loss - $0.40 credit received). If GE closes above $20 on March 16, 2013, 25% return on margin will be gained. If GE falls below $20 upon options expiration, GE stock will be acquired at $19.6, which is 5.63% lower than the current price of $20.77. The projected dividend yield will be near 3.88% based on the acquisition cost of $19.6 with projected dividend of $0.19 per quarter.
Note: All prices are quoted from the closing of December 26, 2012 and all calculations are before fees and expenses. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.