In this article, we will look at three of the world's largest diversified industrial companies - General Electric (GE), Honeywell International (HON), and United Technologies (UTX). We will look at some historical performance indicators, forward growth estimates, and macroeconomic issues in an attempt to determine the winning bet for now.
Here are the three companies for our analysis:
5 Year Growth Forecast
Upside Potential to Reach a Fair Stock Value
Data from Morningstar and Financial Visualizations on January 05, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests the following: Currently two stocks (General Electric and United Technologies) are slightly undervalued. In addition, EFS's fair stock price valuation indicates that GE is trading at the most attractive discount.
What Does 2013 Have in Store for these Industrial Giants?
Although there are differences in some of the markets in which these three giants operate, all have one impact in common - US defense spending. The political climate in the US has introduced uncertainty rarely seen and right now nothing is less certain than the future of defense spending. The recent "fiscal cliff" deal left investors with more questions than answers. Automatic cuts in defense spending could be the result of more political gridlock. A viable solution could include defense cuts, but how much and where?
GE, Honeywell, and United Technologies all make the top 25 list of US defense contractors. At greatest risk is United Technologies.
United Technologies generated $7.9 billion of its total 2011 revenue of $58.2 billion from defense contracts. Its situation is more precarious than those numbers indicate, as UTX's subsidiary Pratt & Whitney is another of the top 25 defense contractors. In 2011 Pratt contributed $4.7 billion to UTX, with $4 billion coming from defense contracts.
On a current valuation basis, United is at best, average; with a P/E of 14.7 compared to an industry average 17.4. On a forward basis, a P/E of 14.02 and a growth forecast of 10% are modest at best, but for income investors, the 2.61% dividend yield could make UTX an attractive prospect.
General Electric did $4.3 billion in arms sales in 2011, far less than United Technologies. Of the three companies, GE is the most broadly diversified with operations in healthcare, energy and transportation infrastructure, commercial aviation, consumer products, and consumer and commercial lending.
You may recall GE's finance operation drove the company's share price close to the $5.00 mark over concerns the global financial system could collapse in the wake of the Lehman failure. Today that streamlined operation produces more than 30% of GE's total revenue.
GE's current and forward valuations are arguably the best of the three companies. The 5 year growth estimate of 10.3% barely trails the 10.6% for Honeywell. The current P/E of 15.8 beats the industry average of 17.4 as well. As you know, value investors like a benchmark of P/Es close to 15 as indicators of solid prospects, and GE's Forward P/E of 10.7 more than hits the mark. GE's debt to equity is high, but the company has substantially reduced the ratio over the last several years.
Honeywell did $5.4 billion in arms sales in 2011, more than rival GE but again far less than United. The company has four major business segments - automation and control systems; performance materials and technologies; transportation systems; and aerospace.
In December 2012, the company acquired mobile computing manufacturer Intermec at a cost of $600 million. This may be a good longer-term move, but in the short term, the company claims the acquisition will lower 2013 EPS by about 3 cents. At the same time, the company issued a bleak forecast for 2013, citing continuing weakness in aerospace and transportation.
On January 3, 2013, an analyst at Langenberg & Company downgraded Honeywell to a Hold from a Buy. The website reporting the news, Dividend.com, does not have HON on its list of recommended dividend stocks. During the trading day of January 4, however, the share price reached a new 52 week high of $65.63.
Honeywell's current P/E of 22.26 and P/B of 4.0 are well above the industry averages of 17.4 and 2.5. However, analysts see 5-year growth for Honeywell at 19.08%, the highest growth for the three companies in our table.
If you believe in the value of diversification, GE has to be a clear winner here. The financial arm alone is enough to justify buying shares of GE over HON and UTX. Current interest rates are allowing companies like GE Capital to borrow at a very low rate and loan at a much higher rate.
Energy demand is expected to continue to climb as emerging market countries grow. GE is a market leader in energy solutions. The company offers products and services to meet the needs of literally every aspect of energy demand. GE makes oil and gas drilling equipment, wind and gas turbines, solar technologies equipment, power generation systems, and other services. 2011 revenue from the company's energy operations hit 30% of total revenue, up from 20% in 2007. Within the energy business, some analysts see continued expansion of revenue generation from GE's oil and gas operations.
Well undervalued GE has the highest dividend yield of the three companies with the attractive current and forward valuations. The company has paid dividends every year for the last ten years, with a high of $1.24 per share in 2008 and a low of $0.46 per share in 2010. The payout ratio ranged from 40% in 2010 to 59.2% in 2009.
One can make a strong case that GE is involved in more business segments with explosive growth prospects like energy and healthcare than its competitors. However, in truth, any one of these three giant conglomerates is a worthy vehicle for investors looking for safety and income. Both Honeywell and United Technologies have also paid consistent dividends over the last ten years at reasonable payout ratios. Growth investors, however, would do well to take a long hard look at GE.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.