Cost-cutting seems to be the order of the day in most industries today, but more so in the conglomerate market. With profits becoming increasingly difficult to achieve, streamlining, re-focusing and layoffs have become common words in an industry, which was dominated by "acquisitions and diversification." For General Electric (GE), United Technologies (UTX) and Siemens (SI), nothing could summarize their current situation more succinctly than "streamlining, re-focus and layoffs." The three cater to industries and individual customers with products covering a vast spectrum of electronics, mechanics and services. As the slowdown in world economy continues to be prolonged, this is my take on the best conglomerate stock option available for the time being.
General Electric is selling its 49% stake in NBCUniversal for $16.7 billion to Comcast (CCMSA). Recently, GE has been operating under the objective of re-focusing on its core capabilities as it exits media and scales back its GE Capital finance arm. Jeff Immelt obviously believes that manufacturing has more potential to spur the company's growth, which has been languishing in mediocrity for quite a while now. According to reports, the company aims to buy back shares worth $10 billion from the inflow of cash. That's good news for investors, but perhaps signs of organic growth from the manufacturing operations of GE will be more welcomed by shareholders who stuck with the stock when it went as low as $6.
In its annual report, United Technologies mentioned that it expects to eliminate 3,000 employees from its work force and restructure costs up to $300 million. UTX has the acclaimed Pratt and Whitney engines subsidiary and Sikorsky Helicopters. The company has been awarded a $65 million contract for engine maintenance on the F-35 by the Department of Defense. China's phenomenal construction growth is also promising for the company, as its Otis elevators and Carrier air conditioners will be amply demanded. The demand for UTX products is spread across continents, which should help spur growth in 2013. However, higher costs have hindered revenue increases for the past 2 years. Increasing profit margins will be key in the future.
Siemens is spinning off its lighting division Osram and plans to shed 8,000 jobs along with it as it puts a factory in China up for sale. High quality global journalism requires investment. Siemens plans to cut $1.3 billion in annual costs by adjusting its manufacturing footprint and will seek an approximate $3.9 billion in savings in procurement by focusing more on design for profitable sales. The company also aims to get rid of fringe businesses, such as baggage handling technology, water treatment and solar units. Furthermore, the company is also looking to exit its partnership with Nokia (NOK) under the name of "Nokia-Siemens" when a shareholder agreement comes to an end in April.
(3 Year Avg.)
Dividend Yield, %
Return on Equity
Upside Potential to Reach Fair Value
Data from Morningstar and Financial Visualizations on March 11, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests that currently all stocks are slightly undervalued. In addition, EFS' fair stock price valuation indicates that currently Siemens is trading at the most attractive discount. At a price of $108, the SI stock has 13% upside potential to reach its fair value.
General Electric stock is the cheapest option of the three at $23.77 and has a 52-week range from $18.02 to $23.90. United technology has a 52-week range from $70.71 to $92.91 and currently trades at $92.07. Siemens stock is the most expensive conglomerate option in this article and has a 52-week range from $77.88 to $112.73. General Electric needs to manage its debt load very carefully as its debt/equity shows the company's Achilles' heel. However, with the sale of NBCUniversal, the company should be able to address some its debt load. Refinancing of its debt will also make the burden somewhat easier to bear. Debt load is also a cause of concern for United Technologies, as it holds almost as much debt as it does assets. Perhaps an anticipated growth rate of 7-8% in Asia over the next 4 years will help the company acquire a better debt rating.
In the case of yields, GE has a significant advantage, especially after increasing its dividend by 12% earlier. Siemens also offers an attractive yield of 2.72%, coupled with much better EPS over the past 3 years. While UTX does not have stellar EPS growth, its continued growth for the future has been somewhat assured by contracts in Turkey, the US and for the provision of nacelle to the second generation Embraer E-Jets.
Make or Break for Investors
GE has been long primed for a rebound and a shift in the stock market, which will alter its fortunes. Now, more than ever, the sale of a single asset (NBCUniversal) is being hailed as the catalyst for its stock price. I find it hard to believe that a company the size of GE and the events that it has encountered over the past decade will simply have an upturn overnight. Yes, the dividend yield is attractive and share buyback program will be helpful, but unless the global demand for its products show intrinsic increases, GE will continue to languish in the same price bracket for 2013.
SI posted a 12% drop in profits for the first fiscal quarter and also announced a dampening of expectations for the future. For the time being, the company looks to be sorting out its house from within and little impetus is being shown towards growth in the product market. While this is indeed a necessary step in order to bring down the costs, it is not very comforting for an investor to know that the next quarter results are already expected to be a disappointment, especially when the alternatives, such as GE and UTX, are cheaper and offer stiff competition. I do not favor SI at the moment because of its lack of ensured future growth - something which its competitors have.
UTX on the other hand, has a unique position in its product offering. Its specialization in aerospace is allowing it to enjoy continued demand for jet engines and related services. Secondly, China's endless thirst for skyscrapers and development provides a very healthy looking derived demand for UTX's air conditions and elevators. Recovery in both these sectors will allow the company to continue enjoying healthy revenue for 2013 and 2014. It is essential to keep the associated costs down and hike its margins for the coming years.
Morningstar provides the following rating for the three stocks: GE - 3/5 buy, 1/5 outperform, 1/5 hold. UTX - 3/6 buy, 3/6 hold. SI - 4/5 hold, 1/5 sell.
While the conglomerate industry is narrowing down and refocusing, strangely enough, UTX's geographical and product diversification is allowing it to have the lead against both General Electric and Siemens. It is inevitable that new directions of production are being found at the company. Its current product line up and global demand can outpace its competitors easily.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.