The global economy has been lagging when compared to its previous performance and benchmarks. While China, India and other developing countries continued to provide a push to global demand, these countries dropped off last year as well. China reported its manufacturing index to have risen to a new two-year high in 2012's Q4. This bodes well for broad spectrum industrial conglomerates which offer multitude of products and services. In this comparison, I take a look United Technologies Corporation (UTX), General Electric (GE) and 3M (MMM) to provide a clearer perspective for the portfolio decisions of a long-term investor.
| United Technologies | |||
Market Cap | $82.3 bil | $235.9 bil | $69.6 bil |
Trailing P/E | 16.8 | 16.2 | 16.1 |
P/B Ratio | 3.3 | 1.9 | 3.9 |
Earnings Growth | 3.9 | -10.6 | 6.8 |
Dividend Yield | 2.61 | 3.38 | 2.32 |
Debt/Equity | 0.9 | 1.9 | 0.3 |
Return on Equity | 18.5 | 10.8 | 25.5 |
Current Price | $89.77 | $22.50 | $101.82 |
Estimated Fair Value Range | $94-$123 | $26-$37 | $96-$123 |
Stock Valuation | Undervalued | Undervalued | Fairly Valued |
Upside Potential to Reach a Fair Stock Value | 5% | 14% | -- |
Data from Morningstar on January 30, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests that currently, both United Technologies and General Electric are undervalued. In addition, EFS' fair stock price valuation indicates that currently General Electric is trading at the most attractive discount.
The re-focus and streamlining adopted this year by United Technologies will help the company further improve its ability to make profits, as suggested by its ROE. Its alarming debt/equity level could hinder the firm's long-term growth potential as it cannot borrow money at the same rate as before. UTX has a fairly respectable dividend yield of 2.61% but that alone will not attract investors. Perhaps the expectation of having a stronger EPS next year will be realized and also bring more investors on board.
General Electric, on the other hand, has an attractive dividend yield of 3.38% but an equally appalling earnings growth of -10.6% over the past 3 years. Furthermore, the debt/equity ratio of 1.9 is also a glaring redline for any investor. However, every company has a story and in the case of GE, the mass restructuring of 2008-2009 has allowed the company to haul back its lost profits. GE is on the upswing, and is continuing to improve its margins and other notable results.
3M is also seeing positive growth, as the company hit an all-time high on the stock market last week when it announced Q4 2012 results. The results are also reflected in the company's influential metrics for financial and stock analysis. It has the best ROE out of its two peers, while its debt levels are phenomenally low. This has allowed it to outpace its competitors and maintain long-term high growth levels, reflected in its three-year earnings growth average.
United Technologies Corporation
Earlier this week, UTX reported better-than-expected quarterly results, though some numbers were still down. The company's EPS for the quarter was $1.04, which was worse than both Q3 2012 and Q4 2011. Much of the slide in value is attributed to costs associated with the company's recent restructuring. UTX's CEO expects the company to have an EPS between $5.85 and $6.15 in 2013. Furthermore, the sale of UTC Power has been conducted in order to help finance the company's $18 billion acquisition of Goodrich Corp, which contributed to the strong sales of $16.4 billion in Q4 2012. The company's valuation and continued growth are dependent on the growing commercial aviation industry and recovering construction industry. UTX acquired Goodrich and a controlling stake in International Aero Engines earlier in the year, and its construction business is being aided by a resurgent China. While the company took the brunt of the restructuring cost in 2012, expect the acquisitions and re-focus on aerospace production to yield greater results in 2013.
General Electric
General Electric reported underlying EPS of $0.44 for Q4 2012, up 13% from Q4 2011. Though uncertain conditions in developed markets have plagued performance, the company's diversion of resources from finance to manufacturing has been well received in different countries: sales were up in China by 19%, Latin America by 22% and Russia by 23% for 2012. It is predicted that the company will continue growing in 2013 and be able to reward investors accordingly as it aims to raise its dividend, increase buyback shares and replace sell-offs with pragmatic acquisitions. GE's 12% growth over the year eclipsed the 9% rise of the Dow Jones Industrial Average, though it still trades below the $42 mark reached in 2007 before the financial crisis.
3M
The increasing demand from China has affected 3M more than GE and UTX. The firm had its biggest sales of the past two years in the Asian market, mainly due to its presence in the healthcare industry, which caused profits to boom by 3.9% in Q4 2012. The company is also downsizing by eliminating 300 jobs as it combines its security and traffic safety business. The company believes that 2013 earnings per share will be between $6.70 and $6.95. Investors should not expect a dramatic change to the product line-up of 3M in 2013, but the CEO has the company's operations under review to shutdown loss-making products. Furthermore, more revenues should be expected in 2013 from China as the company capitalizes on its growth there. 3M shares have risen approximately 16% over the past year, outpacing the roughly 14% rise of the S&P 500 Index.
Make or Break for Investors
The three stocks under discussion have different markets under focus. While 3M had an extremely solid 2012, it is also expected to have a solid 2013. However, GE and UTX are both doing considerably well compared to their lows of the previous years; with the aircraft industry booming, the two companies have strong growth potential for the rest of the year. This leaves the debate hanging on one lynchpin: the price and the expected benefits. UTX and MMM are both expensive stocks, but while their current success is unquestionable, continued improvement in sales, revenues and most importantly stock market performance are not guaranteed. GE on the other hand, is a well-documented case which hit lows in the not so distant past. However, with its affordable share price, GE is the most promising stock to hold for a long-term investor. While MMM and UTX can also be a part of the combined portfolio, I am most inclined towards GE due to its expanding sales and streamlined operations.
Morningstar has analyst estimates for all three of these stocks. For MMM, it provided a 1/4 buy and 3/4 hold rating. UTX has 3/6 buy and 3/6 hold rating. GE is provided with a 3/5 buy, 1/5 outperform and 1/5 hold rating.
Bottom Line
GE's road to recovery will be long, but inevitably fruitful. While it may have offered dismal earnings growth over the past 3 years, I expect its fortunes to shift considerably as a new sun dawns upon a leaner and more focused General Electric.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
