General Electric (GE), the perennial, must-own stock in the 1980's and 1990's, reports their calendar 4th quarter, 2012, financial results before the market opens on Friday, January 18, 2013.
Analyst consensus, per ThomsonReuters, is looking for $0.43 in earnings per share (EPS) on $38.7 billion in revenue for expected year-over-year (y/y) growth of 10% and 2% respectively.
The earnings per share estimate for Q4 '12 has remained stable since the October earnings report, while the q4 1'2 revenue estimate has been revised lower as the quarter evolved.
When you look back on the 1980s and 1990s, GE may have had the perfect business model, with 5 - 7 operating businesses wrapped around their finance subsidiary (as one prominent hedgie put it, GE was a "finance company in drag") and while a strength during the halcyon days of the last century, is considered an operating weakness today.
Today, Jeff Immelt and GE management go to great lengths to talk down the Finance unit and continue to emphasize that GE Capital will be a smaller part of the GE business model going forward.
|q1 '09||$17||-53%||$2.2||-89%||$17 bl||-21%||$4.9||-68%|
* GE TTM CFO - GE's trailing twelve month cash from operations
* GE TTM FCF - GE's trailing twelve month free-cash-flow
* GE Indus - GE's Industrial segment with same cash-flow data
While this table at first glance might appear confusing, basically it is an analysis of GE's cash-flow history, both as "consolidated GE" and then just the Industrial segment of the company. (GE is considered part of the Industrial sector in the S&P 500.)
The bottom line is that if we value just the GE Industrial segment of GE (and assume no value around GE Capital, which is probably much too conservative given GE Capital still accounts for 30% of revenues and more than that of operating profit), and looking at the history of the company back to the late 1990s, GE Industrial generated at its peak, about $24 billion in cash-flow in 2006, with roughly $12 billion in coincident free-cash-flow.
GE Industrial kept the company solvent in 2008 (compare the cash-flow and free-cash-flow of Industrial to total GE), and the segment generates positive cash-flow leverage in a decent economic environment, as well.
With 10.6 billion in shares outstanding (roughly, as GE has had as little as 9.9 billion and as much as 10.9 billion shares outstanding the last decade), GE Industrial should be able to generate $2.00 to $2.25 of cash-flow per share just from the Industrial segment, when the various businesses are hitting on all cylinders.
And therein lies the rub: with global growth still in the earliest stages of its resurgence, particularly in China, Japan and Western Europe, ultimately I think GE is a bet on faster global growth, accompanied by stronger GE revenue growth.
|Year ended||GE rev growth||GE EPS growth|
In 2000, the year GE peaked in terms of its stock price at $60 per share, the company generated total revenue growth of 16%.
GE's business model is built for growth and leverage, and unfortunately this economy is only giving us sub-par growth and deleveraging, at least on the part of private capital. (The reader can quickly see that the next few years estimates for GE in terms of analyst consensus around revenues and earnings, remains conservative, and unfortunately, the forward estimates are still being reduced.)
At present, we think GE is reasonably valued, but requires global growth as the next major catalyst for the stock price. With GE Industrial capable of generating $2.50 per share in cash-from-operations (CFO), we think the stock can trade to $25 easily, and that excludes any GE Capital contribution to the business. (The reason we discount GE Capital so heavily is that GE Capital has an unreasonably low tax rate today, i.e. mid-teens, and management wants it to be a smaller piece of the total company going forward.)
The growing dividend is very nice, but I wish the company would do something about that share count. With GE's cash generation, they should be buying back shares.
To conclude, today, GE has the wrong business model for the wrong economy, but no doubt management sees this and is making adjustments. By the time unified global growth returns, GE should be able to leverage that growth, even though GE Capital will play a smaller role in that growth in the future. (GE is not a major position within client portfolios, but we are slowly building a position.)